Corporation (2019)
GAVIOLA-CLIMACO
Introduction
SOLE PROPRIETORSHIP, PARTNERSHIP
AND CORPORATION DISTINGUISHED
ATTY G: What comes to mind when you hear the word
“corporation”?
S: A business entity and is composed of a number of
people.
ATTY G.: So a grouping of persons, the purpose of
which is to do business. But is the corporation the only
vehicle to do business?
S: No.
TYPES OF BUSINESS ORGANIZATIONS:
1. Sole Proprietorship
A form of business organization with only one
proprietary owner. It is when a person personally or a
single individual conducts business under his own
name or under a business name.
Atty G: What distinguishes a sole proprietorship is
that the individual is the business. You cannot
separate the individual from the business. It is the
most basic form of business organization.
2. Partnership
Articl 1767 NCC: By the contract of
partnership, two or more persons bind themselves to
contribute money, property, or industry to a common
fund, with the intention of dividing the profits among
themselves.
Two or more persons may also form a
partnership for the exercise of a profession.
Atty G: The essence of partnership is that it is
“contractual in nature”. It is created by mere consent.
The moment the partners agree as to what they will
contribute and how to conduct business, there will
now be a contract of partnership between them. You
don’t need to register the partnership with the SEC in
order to create it.
Aside from being a contract, a partnership is
a separate and distinct entity from that of the
partners. It is basically a bridge between sole
proprietorship and a corporation. Partnership is a
contract and at the same time an entity, a business
organization thus, reflecting its peculiarity.
3. Corporation
Section 2, Corporation Code of the
Philippines: An artificial being created by operation of
law, having the right of succession and the the powers,
attributes and properties expressly authorized by law
or incident to its existence.
CORPORATION VS. PARTNERSHIP
AS TO CAPITALIZATION (added by the transcriber)
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⚫ Corporation: The corporation can acquire more
investments since there are unlimited
opportunities for the increase in capitalization.
Consequently, this makes it feasible for the
corporation to engage in bigger business.
⚫ Partnership: Because of the principle of trust and
confidence, only those chosen may invest and be a
partner. Capitalization is limited to the
contribution of the partners and loans from
creditors.
AS TO THE NUMBER OF PERSONS COMPOSING IT
⚫ Corporation: needs at least 5 incorporators but
not more than 15
⚫ Partnership: atleast 2 partners would be enough
AS TO MANNER OF CREATION
• Corporation: created through a legal process and
requires SEC approval via Certificate of
Incorporation
• Partnership: contractual, created by mere agreement
AS TO LIABILITIES
• Corporation: limited liability
o liability of the corporation is distinct from the
liabilities of the persons composing it and the
liabilities of the persons composing the
corporation, as a general rule, are only limited
to their contribution to the corporation
o in other words, stockholders are liable only to
the extent of their contributions in the
corporation
• Partnership
o General partnership: liability can extend to
personal assets
▪ partnership properties are exhausted prior
to partners’ personal properties
o Limited partnership: limited partner’s liability
is limited to contribution
AS TO MANAGEMENT
• Corporation: managed by Board of Directors acting
together (not even individually) who can bind the
corporation
o Ex. to open a bank account, an individual
director cannot perform such in the name of the
corporation as the bank will require a board
resolution
• Partnership: generally every partner is an agent of
the partnership and can bind the partnership
AS TO TRANSFERABILITY OF INTEREST
• Corporation: shares of stock can be transferred
without seeking the consent of the other
stockholders
o corporation’s existence is independent of the
composition of its Board or stockholders
• Partnership: transfer of partner’s interest requires
the consent of all partners
Corporation (2019)
o change in composition of partners
automatically dissolves partnership
AS TO SUCCESSION
• Corporation: right of succession exists
o heirs of stockholder will succeed in the rights
• Partnership: no right of succession
General Provisions
CORPORATION DEFINED
Section 2. Corporation defined
A corporation is an artificial being
created by operation of law, having the right of
succession and the powers, attributes and properties
expressly authorized by law or incident to its existence.
Attributes of a Corporation
1. An artificial being
2. Created by operation of law
3. Has the right of succession
4. Has the powers, attributes and properties expressly
authorized by law or incident to its existence
The bank filed a collection case against Chua and
Goldkey. There are two issues in this case : first issue.
Whether or not UY the wife of Chua can be personally
liable being the officer of hammer garment.
second issue. Whether or not Goldkey can be peirce by
the veil being the surety where its property has been
used as the mortgage on the loan by the hammer
garment ?
With repspect to the first issue on the w/n Uy the wife
of Chua can be personally liable , the Supreme Court
said no because the corporation has its distinct and
separate personality distinct from its officer.
Atty: what happened to Fe tan Uy there was a finding
there that she did not sign the loan agreement? What
happened there?
There was a finding even at the trial court level but why
did the trial court still render her liable for the
obligation of hammer ? What was the ground?
So the ground was not that because she signed the
surety agreement the ground was due to the fact that
she was an officer because it was found that its not
here real signature so the only basis that the court has
in making here liable on the obligation of hammer is
the mere fact that she is an officer and a director of
Hammer . So what happened there? What did the
Supreme Court say?Is that a suffucient ground to make
her liable? The SC said it is not a sufficient ground that
UY will be held liable in this case because of the
sepatate and distinct personality of the corporation.
Atty: So is she liable by the mere fact that she is an
officer?
Student : No atty she is not liable.
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So the Supreme Court said , go back to general rule
because of the separate personality of a corporation
and its officer and stockholders the officer and the
stockholders does not become liable of the obligation
of the corporation by the mere fact of their being an
officer.
DOCTRINE OF PIERCING THE CORPORATE VEIL
It is a recognition that while a corporation is granted by law a personality
distinct and separate from its stockholder - meaning its a separate person,
its an artificial being which is recognized as a person under the law
separate from its stockholder and its members. That artificial being is only
created by law, a mere legal fiction, because in reality there is no real
person there. That recognition as a person is a mere legal fiction created
by law so that when that artificial being is used as a means to commit fraud
or injustice then the law allows that this legal fiction will be taken down.
The law allows that it will pierce the veil of this separate entity and
consider it as one with the persons opposing it. That is the reason behind
the Doctrine of Piercing the Veil.
Solidbank Corporation vs
Mindanao FerroAlloy Corporation
Facts:
Philippine corporation Maria Cristina Chemical Industries (MCCI) and three
Korean corporations: Ssangyong Corporation, Pohang Iron and Steel
Company and Dongil Industries Company, Ltd., entered into a joint venture
under the name of Mindanao Ferroalloy Corporation. The officers of these
corporation comprised the Board members of Mindanao Ferroalloy
Corporation: Guevara as the President and Chairman, Hong the Vice
President, Teresita Cu as a member. Subsequently, the Board of Directors
authorized Guevara to secure a loan of 30Million pesos from Solidbank.
The Mindanao Ferroalloy started their operation in April 1991. However,
the indebtedness acquired from Solidbank ballooned to 200.4Million
pesos while its asset is only 65.4Million pesos. The Corporation executed
Promissory Note signed by Teresita Cu and Jong-Won Hong. They also
executed a Deed of Assignment in favor of the Bank covering its rights, title
and interests: entire proceeds of drafts drawn under Irrevocable Letter of
Credit a Quedan. Hong and Cu also affixed their signatures for the
Corporation. The Corporation, also, through Hong and Teresita Cu,
executed a Trust Receipt Agreement, by way of additional security for said
loan, the Corporation undertaking to hold in trust, for the Bank, some of
its property.
Shortly after the execution of the said deeds, the Corporation stopped its
operations. The Corporation failed to pay its loan. Hence, a collection of
sum of money was filed against the Corporation imploding Guevarra,
Hong, and Cu as joint and solidary debtors.
Question: What was the basis of Solidbank for impleading the officers of
FerroAlloy as solidary debtors of the loan?
Student: Hong and Cu signed the promissory note. Now the bank is saying
that they signed as a co-maker and not just a representative of the said
corporation.
However the Supreme Court said that they actually signed in one set of
signature, as a mere representative of the corporation. It could have been
different if they affixed their signature twice.
Question: Why does it matter if they are signing as representative of the
corporation or signing under their own name?
Corporation (2019) MIDTERM REVIEWER
Student: It is different because a corporation has a separate and distinct
personality as opposed to its officers. So because of that the officers
should not be held liable with the liabilities of the corporation if they did
not act in bad faith or there has no fraud or illegality of the transaction,
and that they are authorized to do such transaction. In this case, it was
shown that they were authorized proven by the Board Resolution.
Question: Let’s go back to that contention you mention, if there are two
sets of signature that would have made them liable. Why?
Student: There is a principle in the Negotiable Instruments Law that was
discussed in the case, if you are only signing as a representative of a
particular corporation and that you are actually authorized to represent
the corporation you should not be held liable.
Question: Why not?
Student: This is because your personality is distinct from the corporation
and you are merely acting on behalf of the corporation.
Question: So, when they sign the loan documents as representatives of the
corporation. Whose obligation was created?
Student: The obligation created is that of the corporation and of the Bank,
not of their personal capacity. They only acted as a representative of the
corporation.
ATTY. GAVI: That is correct, because they signed as officers of the
corporation and representing the corporation then that loan obligation
that was created is not their personal obligation. It is the obligation of the
corporation. They were only acting as representatives of the corporation.
The act and obligation was entered into by the corporation and not the
officers even if they are the ones representing the corporation. Why is
that?
Student: This is because of the artificial being created by law to a
corporation. Since there is an artificial created to a corporation by law then
the officers, members, and representatives of such should not be held
liable since their personality is different.
ATTY. GAVI: If the corporation has an obligation just because it was
contracted through a particular officer, does it now mean that it becomes
the liability of the officer? Why?
Section 2. A corporation is an artificial being. Being an artificial being its
obligations are separate and distinct of its officers, directors, and
stockholders.
Question: Why would it have been different if the officers signed the
second time around?
Student: If they sign the second time around the Supreme Court was saying
that they are already signing in their own capacity and not mere
representative of the corporation. By signing, it means that they are really
liable to the loan.
IF THEY SIGN THE SECOND TIME, WHAT
HAPPENS NOW TO THAT OBLIGATION OF SOLID
BANK?
SOLID BANK CASE CONTINUATION…..
They are now solidary liable because they already bind
themselves not as officers of corporation but in their
personal capacity. The first time they signed, they are
representing the corporation, if they sign the second
time (done na ang corporation na part), SC said they
are now signing on their own behalf, they are now
obliged in their personal capacity but in the case at
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hand, THEY DID NOT, they only signed once. Hence,
they signed on behalf of the corporation.
The officers were not made joint and solidary liable
with the corporation. It is only the corporation that is
liable to the loan contracted by its officers.
Being an artificial entity, a corporation can only act
through its board of directors ( no physical hands to
sign contract). It acts through its officers or board of
directors. When they act on behalf of the corporation,
it doesn’t mean that the obligations created are the
obligations of the board or its officers because a
corporation is an artificial being having a separate and
distinct personality from its stockholders and officers.
But if the representatives would voluntarily take on
themselves the obligation, that’s allowed. In which case
they are now solidarily liable with the corporation
because they bound themselves as such.
CLARIFICATION: REMEDY LEFT FOR
CREDITORS WHEN THE DOCTRINE OF PIERCING
THE CORPORATE VEIL IS DISREGARDED. WHEN
THE OFFICERS AND STOCKHOLDERS ARE NOT
PERSONALLY LIABLE.
ATTY GAVI: Remedy is against the corporation,
when it is proved that the grounds of piercing the
corporate veil are not present or when they did not
bind themselves voluntarily, the creditors have no
other remedy but to go after the corporation. When the
assets of the corporation are not enough, they will have
to go through insolvency proceeding and follow the
rule in preference of credits.
Just because a corporation is liable it does not mean
that its people are liable also, as long as they did not
voluntarily bind themselves and as long as there are no
grounds to pierce the veil.
WHAT ABOUT SIGNING AS CO-MAKER OR CO-
DEBTOR?
That is not piercing the veil, they are liable because of
contract. There is no need to pierce the veil, no need to
prove that they were in bad faith. Piercing the veil is
based on different grounds.
Review from the morning discussion:
The first attribute of a corporation is based on Section
2 of Corporation Code is that a Corporation is an
artificial being which means it has a personality which
is separate and distinct from its stockholders, board of
directors and officers which means that the
corporation can own properties and it can incur
obligations in its own name and that whichever
properties that are owned by the corporation or
whatever obligations that are incurred by the
corporation are its own properties and obligations and
not that of its stockholders, directors or officers.
Meaning, by fiction of law the person of the
corporation is separate from the person of
Corporation (2019)
stockholders that the latter may compose the
corporation but they are not the corporation. However,
in certain instances the fiction or the veil of the
corporation and its stockholders may be lifted in which
case the corporation is considered as one with its board
of directors and stockholders. There are only very
specific instances where this is allowed because the law
considers that corporation as separate entity for the
convenience of the parties involved and to facilitate
economic transactions. If this artificial being is being
used to commit injustice or to defraud the public, the
law will lift the veil because this is only a legal fiction,
it’s not reality. The law will pierce the veil of legal
fiction and consider the corporation as one with its
stockholders.
Zambrano Case
CONCEPT OF ARTIFICIAL BEING
&
PIERCING OF THE VEIL
Facts:
Zambrano et al were employees of PhilCarp and then
they were dismissed because PhilCarp ceased
operation on the grounds of serious business
reversals. So upon termination, they filled a case
against PhilCarp and Pacific contending that they
were illegally dismissed since Phil carp did not incur
serious business losses because as a matter of fact
they are earning. They also want to implead Pacific
because they are mere Alter Ego given the fact that
the assets of Phil Carp was transferred to Pacific and
some of the employees of Phil CArp were absorbed by
Pacific
The Court resolved that there was no illegal dismissal
Atty: So Zambrano was employed by which
company?
B:by Phil Carp
Atty: What did Zambrano want done? And
Why?
B:Wants Phil carp to be liable for illegal dismissal and
at the same time to make Pacific Carpet also solidarily
liable.
Because they contend that there was no serious
business losses incurred by Phil Carp , there was
unfair labor practice.
Atty: And what happened to the operations of
PhilCarp according to Zambrano?
Their operations of Phil Carp was merely transferred
to Pacific
Atty: So according to Zambrano the closure of Phil
Carp was merely a pretense just to get them out of
their employment, to terminate their employment
when in fact the operations of Phil Carp was merely
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transfered to Pacific which they own Subsidiarily . So
now they are claiming from both Phil Carp (initial
employer) and according them ( Zambrano ) ALTER
EGO Pacific Carpet.
Atty: Now what happened in the case?
B:First there was no finding of Unfair labor pracrice ,
since the petitioner failed to prove and they were not
able to cite a specific ground for unfair labor practice
Second , there was no iillegal dismissal. Since in as
much as no one is compelled to open a business, no
one is also compelled to sustain a business.
CORPORATION AS AN ARTIFICIAL BEING
Atty: Before going to the issue of Piercing of veil, this
case also discuses on the effects about the
Corporation being an artificial being.
We mentioned earlier that as an Artificial being , it
has a separate personality form its directors,
stockholders and officers. Besides those people who
else has a Corporation distinct and separate
personality?
B: From any other legal entities to which it may be
related
Atty: Not just stockholders, directors or officers
being the natural person but also any other legal
entity to which they were related.
Doctrine: The Concept of corporation being an
Artificial being does not only apply to the directors,
officers or stockholders (natural persons) it also
applies to ANY OTHER ENTITY to whom the
corporation may be related, even if that entity is a
(Juridical entity)
For example:
You have A-B-C-D-E(natural person-stockholder) of
Corporation B and C.
Under the Concept of Artificial entity , Corporation B
is separate and distinct from ABCDE (stockholders-
BOD-officers) IN the same way Corporation C is
separate and distinct from ABCDE. But at the same
time Corporation C is separate and distinct form
Corporation C.
PIERCING OF VEIL ISSUE
The court said that , the mere fact that Pacific as a
Subsidiary of Phil Carp it will not permit the peircing
of veil .
Corporation (2019)
Under the concept of artificial entity, corporation B is
separate and distinct from A, C, D and E, the
stockholders, board of directors and officers. In this
way, corporation C is separate and distinct from
corporation A, B, D and E, the stockholders, board of
directors and officers and at the same time corporation
C is separate and distinct from corporation D. The
separate entity applies not only to your stockholders,
board of directors and officers but also to any other
legal entity in which the corporation is created. In this
case, we have the Philippine carpet being the
stockholder of the pacific carpet so now the employee’s
contention are that Philippine carpet merely
transferred its operations to pacific carpet and now
they are trying to say that Philippine Carpet committed
unfair labor practice by transferring its operations and
now pacific carpet should also be liable to them so
they’re not claiming against stockholders, board of
directors and officers of Philippine carpet, they’re
claiming against the subsidiary of Philippine carpet.
Thus the rule on artificial being apply in this case. The
Supreme Court said that a corporation has a
personality separate and distinct from the persons
composing it as well as from any other legal entity
which it may be related. The artificial entity is
applicable not just to the persons composing the
corporation but also to any other legal entity which it
may be related. In regards to piercing, it is allowed only
in three instances; first is when there is evasion of
obligation, second is when there is protection of
commission of a wrong and third is in alter ego cases
which is one given in this case. In alter ego cases, it
must passed the three test, first is the instrumentality
test, second is fraud test and third is the harm test. In
instrumentality test, the mere fact that one corporation
is controlled by a person, a single person does not
permit the piercing because it must also be prove that
such control extends to policy making, financial
activities and etc. with regards to the fraud, there must
be a clear and proof of fraud that the corporation was
used to commit a fraud. And in the harm test, there
must be a causal relationship between the use of the
identity of the corporation and the harm committed. In
this case, the mere fact that Pacific is a subsidiary will
not allow piercing. With regards to the transfer of
assets, it was found out that the transfer of asset was
actually a sale from Philippine carpet to Pacific Carpet
which explains the claim of the petitioners why there
are income generated by the Philippine carpet.
Atty G: what do you mean by evasion of obligation?
Student: since a corporation has a separate entity of its
own, the owners may protect themselves by creating an
entity that would absorbed the obligations that they
may incur and therefore shield them on the doctrine of
limited liability. What happens then is the whole
obligation of the supposed obligors may not be
enforced against them because of the shield of the
corporate fiction so the creditors will be prejudiced on
the use of the corporation. In which case, the legal
fiction will not be allowed to prevail.
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Atty. G: so one, if the corporate vehicle is used to evade
obligations, the corporate then will be pierced and the
stockholders will still be made liable for the obligation
of the corporation.
Student: second is the protection of commission of a
wrong, since the corporation is a separate entity, it can
only act through its agents, so a corporation cannot be
held, for example, criminally liable. So if there are
perpetrators, they might say for example commit
estafa through the corporation then the corporate
fiction will be used for them.
Atty. G: so when the corporate fiction is used to
defraud or commit a crime then a corporate fiction will
be pierced and the stockholders will be held liable. The
third instance is alter ego cases.
Student: The alter ego principle is that, a corporation
is created by another person or juridical person
through which the transactions of that person is
directly done through the corporation, the essence of
alter ego principle is that the person who is using the
corporation in shielding himself from any possible
liabilities that may arise from its transactions. The
difference between that and the first one is that the first
one, there might be a pre-existing intent to defraud
whereas the third one there might be none, that he is
just shielding himself from any possible liability.
Atty. G:The essence of the alter ego principle is
CONTROL. If somebody is controlling the corporation
such that the corporation basically does not have its
own mind because a person is controlling not just
majority but complete dominion not only of its
finances but also its policies and business practice so
whatever the decision of this controlling person is
considered the decision of the corporation, so control,
not just financial but also with respect to business
decisions and operations and you use this control in
order to commit a fraud or wrong, and that the control
causes harm or injury to other persons. In this case, the
corporation is merely your alter ego such that whatever
obligations incurred by the corporation because of
your control can be attributed to you and that person
controlling the corporation becomes liable.
So when do you apply the alter ego principle? There are
three test
Student: the instrumentality, the fraud and the harm.
The instrumentality test means the person has control
including the financial activities and policies. Second is
fraud test, the entity is used to commit fraud. Lastly,
the harm test, there is a causal connection between the
injury to the person and the use of the corporate
fiction. The ruling of the SC in this case is that, there
was no alter ego or control because while there is
Corporation (2019)
control in the subsidiary it does not amount to alter
ego. There is absence of harm and fraud.
CONTINUATION OF MARTINEZ CASE.
.. so that was the relationship of the parties.
(What’s the letter of credit for? How does it
work?
Atty. Gavi: It is a financial instrument it’s used
basically as a bridge between buyer and seller
especially if they are located in different countries.
• Illustration: if I were a buyer, I am not going
to pay you until I get the goods because if I pay
you what if I don’t get the goods? On the other
hand if I was the seller, I’m not also going to
pay you if I don’t get paid, because what
happens if I ship the goods, its already with
you and you don’t pay me? Okay ra if we’re in
the same City, what if you’re in HK and I’m in
Cebu. So how do you reconcile? You do a letter
of credit transaction. So as the buyer, you’re
going to go to a bank, open a letter of credit
and then the bank will contact its
correspondent bank where the seller is, and
then you will say “hey, seller, I have here a
letter of credit in your favor, you ship the
goods to the buyer then give me the shipping
documents, the moment you give the complete
shipping docs, me and the bank will pay you”
so the seller knowing that he will get paid by
the bank will ship the goods, the bank now will
turn around and tells the buyer “hey mr. buyer
the good are on their way, these are the docs
you will need to claim the goods, now pay me
what I paid the seller”)
So that is what was used in this case, we have here CLL
buying molasses from Mar Tierra, so as part of that
transaction, CLL opened a letter of credit in favor of
Mar Tierra. So Mar Tierra, shipped goods to CLL
knowing that its going to get paid under the letter of
credit. But ultimately, the letter of credit is a
liability of the buyer because iya man I
reimburse ang bank, so the letter of credit is
the liability of CLL.
Atty. Gavi: What happened next?
S: Gonzales requested the respondents (BPI) to
transfer the $340k dollars of the 1 st money market
placement account into CLL’s private account and vice
versa. So, CLL transferred $340k to Mar Tierra’s
account.
Atty. Gavi: When Gonzales instructed the bank to
transfer, he was acting on behalf of whom?
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S: CLL
Atty Gavi: So Gonzales, a representative of CLL
instructed the bank that “okay, you transfer the
amount to Tierra” it was in payment of their obligation
to Mar Tierra. Did the bank comply? Then what
happened?
S: Yes, then a few months later, Martinez instructed
the bank to transfer (same request as Gonzales).
Atty. Gavi: What happened after the letter of credit
was opened?
S: After the letter of credit was opened, Wilfredo and
Ruben Martinez, and Gonzales opened the money
market placement value with BPI, after that Gonzales
instructed BPI to transfer the $340k to the account of
Mar Tierra. However, that time the money placement
value has not yet matured, so what BPI did was I think
it’s termed as account receivable for CLL and then that
amount was transferred to Mar Tierra. By the time that
the money placement value has matured, they just
allowed Wilfredo to withdraw the $340k.
Atty. Gavi: So in other words, the funds transferred
to Mar Tierra was supposed to be from the Money
Market placement when it was not yet matured the
bank held off on debiting that account, what it did
instead is it recorded a receivable from CLL.
But when the money market placement matured, did
the bank debit the account with the money transferred
to Mar Tierra? they did not deduct. So what happened
next?
S: W. Martinez was able to withdraw that amount, so
that’s the reason why the BPI collected that amount
from CLL.
Atty. Gavi: (reiterations) So when everything was
said and done, that $340k transferred to Mar Tierra
was supposed to be deducted from their deposit with
the bank, but the bank did not deduct, so it just
recorded a receivable, and then worse is it allowed CLL
and its representatives to deduct the full amount of the
deposit without taking into consideration that they still
had an obligation in the amount of $340k. So now, the
bank was left with no money in its hand but with a
receivable with CLL. So what happened?
S: So the bank tried to collect from CLL and Ruben and
Gonzales, but they refused.
....the bank tried to collect from CLL, Ruben and
Gozales but they refused. Eventually, they discovered
that they really have a payable to BPI after auditing
their account. BPI filed a collection case. Since they
refused to pay BPI asked the court to pierce the
Corporation (2019)
corporate veil, claiming that since the majority of the
stockholders are the same.
The respondents to the complaint filed by the bank are
CLL, Ruben, Lacson, Gonzales, and Wilfredo Martinez.
Wilfredo is a stockholder of CLL. Ruben is not a
stockholder of CLL. He is the stockholder of RJL corp
which is a stockholder of Martiera. Martiera is the
supplier of CLL and they also have common
stockholders. The SC ruled that the mere identity
of the officers is not sufficient to pierce the
corporate veil.
The persons, as ruled by the court, who were not held
liable are Ruben and Gonzales. Wilfredo Martinez and
Lacson were held liable because they signed a surety
agreement and not because of piercing the veil. This is
because they voluntarily bound themselves. Ruben was
one of the signatories of the account but he did not sign
the surety agreement.
The RTC found the claim of the bank to be valid. That
yes, CLL, the two Martinez and Lacson are liable under
the piercing of the veil. That they were being used to
defraud the bank. The CA agreed that they are liable
except for Gonzales, considering that he was merely an
employee and not a stockholder. Ruben went to the SC
on the ground that there was no basis on the judgment
against him. Why? Because the rest of the stockholders
signed a surety agreement. Having signed such will
make one liable jointly and solidary liable with CLL.
You do not even need to pierce the veil because they
bound themselves voluntarily by contract.
What about Ruben? The ground for including him as
one of the solidary debtor merely on the basis of
piercing the veil/ the alter ego doctrine. According to
the SC, it pierced the veil to CLL to Martiera to RJL and
to Ruben who was the majority stockholder of RJL,
saying that all of these persons are one and the same.
That CLL was merely a paper corporation and sham
used to defraud the bank. The only proof that they had
is the common stockholding between Martiera and
CLL. THAT IS NOT A SUFFICIENT GROUND TO
APPLY THE ALTER EGO PRINCIPLE. As we go
back to the case of Zambrano, we apply the alter ego
when there is a concurrence of 3 elements: (control,
fraud, injury)
THREE TESTS:
1. CONTROL TEST – not just financial, but
COMPLETE business and operating control
control.
2. INSTRUMENTALITY TEST – that control
must be used to defraud.
3. HARM TEST – that fraud cause harm to the
other party.
In this case, the bank was able to establish only the
common shareholdings between CLL and Martiera.
But they have no proof to show that Martiera was using
CLL to conduct fraud. In fact, the SC found that there
was a valid business transaction between CLL and
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Martiera. Martiera also has other clients other than
CLL. The SC found that there was no fraud. And since
there was no fraud, there was not harm. And since
these two elements are missing then you cannot apply
the alter ego doctrine. So, there can be no piercing the
veil as far as Ruben is concerned.
UY VS. INTERNATIONAL AUS BANK
The bank granted a loan to Hammer which is secured
by the property of Goldkey under a surety agreement
signed by Chua and his wife. Hammer defaulted with
the payment. The property of Goldkey was foreclosed.
But there is still an outstanding balance of the loan.
Bank filed a collection case against Hammer, Goldkey
and Chua. The issues are: whether or not UY can be
held personally liable, being an officer of Hammer; and
whether or not the alter ego doctrine is applicable in
this case.
There was a finding by the trial court that Uy did not
sign the loan agreement. But she was made liable solely
because she is an officer and director of the
corporation. That is the only basis that the court had.
The SC said that it is not a sufficient ground to hold her
liable because a corporation has a personality
distinct from its officers and stockholders. The
officer does not become liable with the obligations of
the corporation by that mere fact.
What about Goldkey? It was ruled that the corporate
veil must be pierced on the ground that Goldkey is a
mere alter ego of Hammer because of certain
circumstances such as they have common
stockholders, both are family corporations by Chua
who is the president of both corporations, they share
the same office, when Chua disappeared, Goldkey and
Hammer ceased operations. But the reason which
cannot found in any other case is the commingling
of assets of the corporations. This means that
when Hammer contracted the loan, Goldkey was also
benefited by it. Whatever benefits that Hammer
received from the loan was also enjoyed by Goldkey. SC
said that you are under the same control, you have the
same person running the corps, and that you
commingled you assets, even without mentioning
fraud, or harm which is a requirement under the alter
ego doctrine, Goldkey is still liable.
Teacher: Whatever benefits that Hammer receives
from the proceeds of the loan, it is assumed that
Goldkey also enjoyed it because they co-mingled their
assets. So now that Hammer cannot pay, Goldkey
should be held liable. Are we clear? Are we clear class?
Questions so far?
Student: For purposes of the exam, if given the
situation that the companies co-mingled their assets, is
it safe to answer that we can provide the case?
Corporation (2019)
T: Yes, you cite the case. Student, CIR vs Norton &
Harrison.
S: It is about a case where Norton and Harrison
company came into an agreement with Jackbilt where
it manufacture concrete blocks. They came into an
agreement where Jackbilt will manufacture these
concrete blocks and Norton will sell it to the public, and
it was found out that, when Norton and Harrison sells
it to the public, sells it, it will receive a lesser amount
and the rest of the (inaudible) of the amount goes to
Jackbilt and.
T: So how many transactions were there in the sale of
the goods? How did they structure their transactions?
S: It was like a buy and sell structure, buy and sell …
T: Who buys?
S: Norton and Harrison buys the concrete blocks from
Jackbilt, and then upon buying them, Norton and
Harrison will sell it to the public. And the proceeds of
the sale will go to, will go to both of them. The bigger
amount goes to Jackbilt and the lesser amount serves
as profit or the compensation in selling the concrete
blocks to Norton and Harrison.
T: Okay, take note class that this case happened 1964
pa or 1940’s ang facts occured. So lahi pa, the corporate
income tax then was different. So you have here two
companies, one is the manufacturing, the other is the
distributor. Okay? What did they have in common?
1:26 - 1:29
S: Three years after their agreement or their
arrangement rather, here comes Norton and Harrison
eventually buying the assets of Jackbilt.
T: Assets? They purchased the assets?
S: Outstanding shares of stocks.
T: They purchased the shares. What’s the
difference between purchasing assets and
purchasing shares? For example you have A
company and B company. What is the
difference if “A company will buy all the assets
of B company” or “A company buying the
outstanding shares of B company”? Is it the
same or are they different transactions? They
are different. So don’t interchange them.
What’s the difference?
When you buy assets, you acquire the business.
You acquire the business because now you
have all the assets of that other entity but you
don’t acquire another entity. Do you get it? You
acquire the assets of B so you acquire its
business but you don’t acquire B. Get it?
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But if you buy shares, you are not only buying
the business, you are buying the entity. Do you
get it? So rather than buying the business, you
buy the entity, you buy shares. So you acquire
a subsidiary. So be careful with that. That’s not
the same. So in practice, you can do an asset
purchase or a share purchase. Two very
different transactions.
Okay? So what was the transaction here?
S: The sale of the concrete blocks, or the purchase of
the assets of the, or the outstanding shares of stocks
T: The shares of Jackbilt were purchased by Norton. In
effect, Norton now acquired control.
1:29 - 1:33
T: So Norton and Harrison became the sole
stockholder of Jackbilt. They now have control over
Jackbilt. What happened next?
S: The CIR (inaudible) collecting sales tax said that the
sale, it should disregard the entity of Jackbilt since its
shares were acquired by Norton. The sales tax should
be imposed upon the sales made by Norton to the
public, and not the sale by Jackbilt to Norton.
T: Why?
S: Because after the, after Norton purchased the
outstanding shares of Jackbilt, the CIR said that
(inaudible) Jackbilt is now the corporation of Norton
since it exercises control over Jackbilt.
T: What was the effect of the two transactions, the
scheme done by Norton and Jackbilt? What was the
effect of that of their tax liability? Why is the CIR
saying that there should only be one sale? How many
sales were there? Two diba? Jackbilt to Norton then
Norton to the public. But now the CIR is saying that no,
there should only be one sale because is the same as
Norton. Why would the CIR do that? Of course, they
want to get more taxes. How is that scheme, nga iduha
ka transaction, depriving the CIR of taxes? Why?
Because lain-lain man nga sales price. Lain ang price
from Jackbilt to Norton, and they declared that as
different revenue. Okay? At that time, the lower the
revenue, the lower your tax rate. Mura xag individual
the taxation style bah. Have you have your tax already?
Then from Jackbilt to Norton, another sale. So daku
man ang cost, so again lower na sad ang tax. Diba?
Because they broke the transactions into two, ni-
qualify sila for a lower bracket sa tax rates. You
understand? Whereas if ila lang tu giusa nga sale, daku
ang revenue, that means that they go to the higher
bracket. So the CIR is saying that no, there
should be only one sale, direct from Norton to
the public. We disregard from Jackbilt to
Corporation (2019) MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO

Norton because that first sale was only used to
create a buffer to lower their tax. So you
understand? So what happened?
CIR VS. NORTON AND HARRISON COMPANY
GR NO. L-17618, AUGUST 31, 1964
xx---direct from Norton to the public. We disregard the
sale from Jackbilt to Norton because that first sale was
only used to create a buffer to lower their tax.
General Rule, just because one corporation
owns another, it doesn’t mean that they are one and the
same corporation; they are still separate and distinct.
However, there are circumstances to show that the
separate personality is used to evade an obligation then
that separate personality will be disregarded and both
corporations will be considered as one.
So in this case, the Supreme Court found that Norton
and Harrison and Jackbilt were structed in such a way
as to evade paying the larger amount of tax; and it was
shown that basically the two corporations were under
the same control. It was Norton and Harrison who
financed the operations of Jackbilt. Since there was a
finding that the structure was made that the two-
pronged sale was made just to avail of a lower tax, then
the Supreme Court said that Yes, we disregard the
separate entity and consider that there should only be
one sale—the sale from Norton and Harrison to the
public. So that sale is assessed with a higher tax rate,
and Norton and Harrison were held liable for
deficiency tax.
(End of Norton Case Discussion)
There are instances where piercing the veil will
not apply. For example, in the case of Francisco
Motors, what happened there was the reverse.
Supreme Court refused to apply the piercing the veil
principle here.
It’s not black and white, but generally, piercing
the veil will only apply if you want to make the
stockholders liable for the liabilities of the
Corporation, not the other was around. Why? You go
back to the essence of piercing the veil—if you are using
the legal entity to defraud, so if naa na siya then you
pierce the veil. In this case, there was no such
allegation that the Corp was being used to defraud the
lawyer. So, the Supreme Court, it will not apply.
KUKAN INTERNATIONAL CORPORATION VS. HON.
AMOR REYES
GR NO. 182729, SEPTEMBER 29 2010
Here, you have a supplier not being paid.
Supplier sued Kukan Inc., and then Kukan Inc. stopped
appearing in court, so that judgment was made and
then Kukan Inc. was held liable. However, when they
served the writ of execution, they found that there was
another Corporation occupying the premises, Kukan
International Corporation—same stockholder but
different corporation. So now you have the supplier
trying to enforce the judgment of Kukan Inc. against
Kukan International Corporation and the justification
is piercing the veil. Can he do that? No. The Supreme
Court said that while piercing the veil can be used as a
basis to impute liability, it cannot be used as a basis to
acquire jurisdiction. That’s a different matter—
acquisition of jurisdiction is something that’s
technical. You cannot just enforce a judgment against
Corporation A when the judgment was against
Corporation B under the guise of piercing the veil. The
Supreme Court said that it is not how piercing the veil
works. It is used to establish a liability but it is not used
to acquire jurisdiction.

FRANCISCO MOTORS CORPORATION VS. CA

GR NO. 100812, JUNE 25, 1999

The stockholders had a payable to lawyer.

What the lawyer did was that he sued the stockholders
and the Corporation. Nagreverse siya, diba ang
piercing the veil is when you sue the stockholders for
the liabilities of the Corporation? In this case, you’re
suing the Corporation for the liability of the
stockholders. The Supreme Court said na well, there’s
no definite rule on how to apply here piercing the veil,
but definitely, it is for the protection of the public, diba.
For the protection of the public, when you are using
that legal fiction of that corporation to defraud the
public, that’s the essence of piercing the veil. You’re
using that legal fiction to defraud the public and in
order to escape liability. Is that applicable in this case?
It’s not, because in this case, the legal entity of the
Corporation was not being used to defraud the public.
In fact, the obligation that was being claimed was the
personal obligation of the stockholders, so the
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