Doctrine of Piercing the Veil of Corporate Fiction

Question 1

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

Answer 1

It is the doctrine that allows the State to disregard, for certain justifiable reasons, the notion or fiction that the corporation has a separate legal personality from those composing it. The doctrine of separate juridical personality (doctrine of separate legal entity) is only a fiction to promote public convenience. If this fiction is misused or abused, then the State shall pierce the corporate veil and treat the corporation and the persons composing it as one and the same entity.

Question 2

In what areas does the doctrine of piercing the veil of corporate fiction apply?

Answer 2

The doctrine of piercing the corporate veil applies in three (3) basic areas, namely:
(1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation;
(2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or
(3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit, or adjunct of another corporation.

The doctrine likewise applies in the following cases:
(1) Under a variation of the doctrine of piercing the veil of corporate fiction, when two business enterprises are owned, conducted, and controlled by the same parties, both law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that two corporations are distinct entities and treat them as identical or one and the same.
(2) When the complaint alleges that the directors and/or officers committed bad faith or gross negligence in conducting the affairs of the corporation.

Question 3

What are the effects of piercing the corporate veil? Does it result in the dissolution of the corporation?

Answer 3

The piercing of the corporate veil does not dissolve the corporation. It simply means that the stockholder and/or director and/or officer, whose action/s became the basis for the application of the doctrine, and the corporation shall be treated as one and the same entity. In traditional piercing the corporate veil, the concerned stockholders, directors/trustees, and officers become liable for the obligation of the corporation. In reverse piercing the corporate veil, the corporation becomes liable for the debts of the concerned stockholders/members, directors/trustees, and officers of the corporation.

In case the corporation is just the an alter ego of another corporation, both corporations become one and the same entity.