Doctrine of Piercing the Corporate Veil

Question 1

What is the Doctrine of Piercing the Corporate veil?

Answer 1

The doctrine that a corporation is a legal entity distinct
from the persons composing is a theory introduced for
purposes of convenience and to serve the ends of
justice. But when the veil of corporate fiction is used as
a shield to defeat public convenience, justify wrong,
protect fraud, or defend a crime, this fiction shall be
disregarded and the individuals composing it will be
treated identically (Cruz vs. Dalisay, 152 SCRA 487
[1987]).

Question 2

Who has the authority to pierce the corporate veil?

Answer 2

The doctrine requires the court to see through the
protective shroud which exempts its stockholders from
liabilities that they ordinarily would be subject to, or
distinguishes a corporation from a seemingly separate
one, were it not for the existing corporate fiction (Lim
vs. CA, 323 SCRA 102)

Question 3

What is the effect of the doctrine of piercing the corporate veil?

Answer 3

In any cases where the separate corporate identity is
disregarded, the corporation will be treated merely as
an association of persons and the stockholders or
members will be considered as the corporation, that is,
liability will attach personally or directly to the officers
and stockholders (Umali vs. Court of Appeals, 189
SCRA 529 [1990]).

However, mere ownership by a single stockholder or by
another corporation of all or nearly all of the capital
stock of a corporation is not of itself sufficient ground
for disregarding the separate corporate personality
(Umali vs. Court of Appeals, 189 SCRA 529 [1990])

 The doctrine aims to protect the interest of innocent
third person dealing with the corporation.

Question 4

Classification of facts on which corporate entity may

be disregarded:

Answer 4

1. Avoidance of redress of fraud;
2. Prevention of evasion of statute or law;
3. Prevention of evasion of contract;
4. Internal corporate dealings disregarding corporate
   entity where third persons are not involved;
5. Corporation agencies or instrumentalities of
   undisclosed principals
    These enumerations are not exclusive and sometimes
   two or more of these elements concur.

Question 5

Nature and Consequences of Piercing Doctrine

(Philippine Corporate Law, Cesar Villanueva, 2001 ed.):

Answer 5

1. has only res judicata effect;
2. to prevent fraud or wrong and not available for
   other purposes;
   The doctrine could not be employed by a corporation to
   complete its claims against another corporation and
   cannot therefore be employed by the claimant who
   does not appear to be the victim of any wrong or fraud
   (Traders Royal Bank vs. CA 269 SCRA 601 [1997]).
3. essentially a judicial prerogative only
   To pierce the veil of corporate fiction being a power
   belonging to the courts, a sheriff who has ministerial
   duty to enforce a final and executory decision cannot
   pierce the veil of corporate fiction by enforcing the
   decision against the stockholders who are not parties
   to the action (Cruz vs. Dalisay, 152 SCRA 487 [1987]).
4. must be shown to be necessary and with factual
   basis
    To disregard the separate juridical personality of a
   corporation, the wrongdoing must be clearly and
   convincingly established, it cannot be presumed
   (Luxuria Homes, Inc. v. CA, 302 SCRA 315 [1999]).
   When directors and officers are unable to compensate
   a party for a personal obligation, it is far-fetched to
   allege that a corporation is perpetuating fraud or
   promoting injustice, and thereby could be held liable for
   the personal obligations of its directors and officers by
   piercing the corporate veil (Francisco Motors, Inc. vs.
   CA, G.R. No. 100812, June 25, 1999).

Question 6

Classification of piercing the corporate veil (FAE)

Answer 6

1. Fraud Cases
    When the corporate identity is used to justify wrong, to
   commit fraud, or to defend a crime.
    There is always an element of malice or evil motive in
   fraud cases.
   Elements:
   a. There must have been fraud or evil motive in the
   affected transaction and the mere proof of control
   of the corporation by itself would not authorize
   piercing.
   b. The main action should seek for the enforcement
   of pecuniary claims pertaining to the corporation
   against corporate officers or stockholders, or viceversa;
   and
   c. The corporate entity has been used in the
   perpetration of the fraud or in justification of wrong,
   or to escape personal liability.
2. Alter Ego Cases (or Conduit Cases)
    Fraud is not an element in these cases but that the
   stockholders or those who compose the corporation did
   not treat the corporation as a separate entity but only
   as part of the property or business of an individual or
   group of individuals or another corporation.
   Probative factors
   a. Stock ownership by one or common ownership of
   both corporations;
   b. Identity of directors and officers;
   c. The manner of keeping corporate books and
   records; and
   d. Methods of conducting the business (Concept
   Builders, Inc. v. NLRC, 257 SCRA 149 [1996]).
3. Equity cases
    When piercing the corporate fiction is necessary to
   achieve justice or equity.
    The “dumping ground” where no fraud or alter ego
   circumstances can be culled to warrant piercing.

Question 7

What are the Four Policy Bases in Piercing?

Answer 7

Four Policy Bases in Piercing:
a. Even when the controlling stockholder or managing
officer intends consciously to do no evil, the use of
the corporation as an alter ego is in direct violation
of a central corporate law principle of treating the
corporation as a separate juridical entity from its
members and stockholders;
b. If the stockholders do not respect the separate
entity, others cannot also be expected to be bound
by the separate juridical entity;
c. Applies even when there are no monetary claims
sought to be enforced against the stockholders or
officers of the corporation;
d. When the underlying business enterprise does not
really change and only the medium by which that
business enterprise is changed.

Question 8

what is the Instrumentality or Alter Ego Rule

Answer 8

When 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 to the instrumentality may be
disregarded (Concept Builders Inc. vs. NLRC, 257
SCRA 149 [1996]).
Test:
1. Control, not mere majority or complete stock
control, but complete dominion, not only of
finances but of policy and business 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 incontravention of plaintiff’s legal rights; and
3. The aforesaid control and breach of duty must
proximately cause the injury or unjust loss
complained of (Concept Builders Inc. vs. NLRC,
257 SCRA 149 [1996]).