When a corporation’s separate personality may be disregarded
By Nica Marsha Gasapo on March 2,2023
A corporation is an artificial being created by law which is vested with a personality that is separate and distinct from its shareholders, directors, officers, and other connected or related corporations. By this attribute, a stockholder may not generally, be made to answer for the acts and liabilities of the corporation, and vice versa. Thus, one significant advantage of setting up a corporation is this “separate personality”, which insulates and separates stockholders from the liabilities of the corporation.
However, a corporation’s separate and distinct personality may be pierced or disregarded in certain instances. When the corporate veil is pierced, the corporation and persons which are normally seen and treated separately from each other are viewed and treated as one, such that, when the corporation is adjudged liable, said persons become liable as well as if they were the corporation itself.
The doctrine of piercing corporate veil applies to all corporations, whether stock or non-stock, and even to one-person corporations.
In Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations Commission (GR 170689, March 17, 2009), the Supreme Court held that corporate fiction may be pierced when it is necessary to protect the rights of third parties. In such instances, law and equity will disregard the legal fiction that said corporations are separate and distinct entities from their stockholders and treat them as identical or as one and the same.
Thus, while a corporation may exist for a lawful purpose, the law will regard it as a collection of persons, or if involving corporations, unite them into one, when the legal entity of the corporation is used as a cloak for fraud or illegality.
Although the Court will not hesitate to disregard the corporate veil when it is improperly used or necessary in the interest of justice, the piercing of the corporate veil should, however, be done with caution and only under certain exceptional circumstances. In other words, the separate juridical personality of a corporation will only be disregarded when the wrongdoing is clearly and convincingly established.
In several instances, our Supreme Court has upheld the application of the doctrine of piercing the veil of corporate fiction when corporate fiction was used to defeat public convenience, justify wrong, protect fraud, defend crime, or when it is made as a shield to confuse legitimate issues, or when a corporation is the mere alter ego or business conduit of a person, or where the corporation is organized or controlled such that its business is conducted to make it merely an instrumentality, agency, conduit, or adjunct of another corporation.
Further, when the separate personality of a corporation is used as a means to perpetuate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, or the circumvention of statues, our Supreme Court has held that piercing of the corporate veil is warranted.
It must be noted, however, that the piercing or corporate veil is hinged on the basic rule that the corporation concerned must have been properly served with summons or properly subjected to the jurisdiction of the court. The corporation cannot be subjected to an execution of a decision meant for another and in violation of the corporation’s right to due process. In other words, the doctrine of piercing the veil of corporate fiction can be applied only after the court has already acquired jurisdiction over the corporation.
In one case decided by the Court of Tax Appeals (CTA), it was ruled that the civil liability arising from the assessment, should be collected from the corporate taxpayer and not the accused-president of said corporation. The CTA emphasized that the corporation is a separate and distinct entity. In this case, while accused is the president of the said corporation, he himself is not the corporation, but merely a responsible officer. Hence, the CTA emphasized the rule that only when the circumstances warrant the application of the doctrine of “piercing the corporate veil” can the courts hold stockholders and/or officers of the corporation directly liable for corporate tax liabilities.
In another case, the Supreme Court, revisiting the principle of piercing corporate fiction, or treating related corporations as one and the same juridical entity in view of a given transaction, held that said principle is applied only to determine liability. It is not to be used to confer to a court a jurisdiction it has not acquired over a party not impleaded in a case. Simply put, a corporation not impleaded as a party in a case cannot be subjected to the court’s power of piercing the corporate veil. If the court has not acquired jurisdiction over the corporation, any proceedings taken against the corporation and its properties would be a violation of its right to due process.
In Pacific Rehouse Corp. v. Court of Appeals (GR 199687 and 201537, March 24, 2014), the Supreme Court emphasized that, if the court has not acquired jurisdiction over the corporation, the court has no business piercing its corporate veil because it is a violation of the corporation’s right to due process. Therefore, according to the Supreme Court, it is only after the court has acquired jurisdiction over the concerned corporation that parties may be allowed to present evidence for or against piercing the veil of corporate fiction.
The above rule, however, allows for an exception. In International Academy of Management and Economics v. Litton and Company Inc. (GR 191525, Dec. 13, 2017), discussed that if it is shown “by clear and convincing proof that the separate and distinct personality of the corporation was purposefully employed to evade a legitimate and binding commitment and perpetuate a fraud or like wrongdoings,” the concerned corporation cannot evade the application of piercing the corporate veil citing the violation of its right to due process. As has been already ruled by the Supreme Court, a party which is vulnerable to piercing its corporate veil cannot argue violation of due process.
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Nica Marsha V. Gasapo is a Senior Associate of Mata-Perez, Tamayo and Francisco (MTF Counsel).