Piercing the veil of corporate fiction

ONE of the important features of a corporation is its having a legal personality, which is separate and distinct from its owners or stockholders. This springs from the very essence of a corporation as “an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incidental to its existence” (Revised Corporation Code, section 2).

As a consequence of this separate juridical personality, the corporation’s assets and properties are not considered owned by its stockholders. The corporation cannot be held liable for the obligations of its shareholders or members, or those of its officers, and neither can shareholders be held liable for the obligations of the corporation.

This separate personality of a corporation provides protections for shareholders and promotes capital formation.

However, this principle can also be misused to perpetrate fraud, evade obligations or commit wrongdoings. In such instances, under the doctrine of piercing the veil of corporate fiction, the separate corporate personality can be disregarded, and the stockholders can be made accountable or liable for corporate acts.

In such event, the corporation and its stockholders or members, or a corporation and another related corporation, could be treated as a single entity, and the corporation may be considered as an aggregate of individuals.

However, the piercing of the veil of corporate fiction must be done with caution. It is meant to apply only in situations where the separate corporate personality of a corporation is being abused or being used for wrongful purposes (Spouses Fernandez v. Smart Communications Inc., GR 212885, July 17, 2019).

The Supreme Court has consistently recognized three instances in which piercing the corporate veil may be warranted: (1) when the corporation’s separate personality is being used to defeat public convenience, such as to evade existing obligations; (2) in fraud cases or when the corporate entity is used to justify a wrong, protect fraud or unlawfully defend a crime; and (3) in alter ego cases, where a corporation’s existence 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 (ABS-CBN Broadcasting Corporation v. Honorato Hilario, GR 193136, July 10, 2019, citing PNB v. Hydro Resources Contractors Corp., GR 167603, March 13, 2013).

Fraud or illegal act

When the fiction is used as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or the perpetration of knavery or a crime, the corporation shall be considered merely as an aggregation of individuals (San Juan Structural and Steel Fabricators Inc. v. Court of Appeals, 296 SCRA 631 [1998]). There must be 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. In this case, the piercing doctrine becomes an “equitable remedy” which can be invoked only on behalf of the parties who are the victims of fraud, deceit or injustice brought about by the use of, or as a result, of the attributes of the corporate juridical personality.

Alter ego theory

The alter ego theory requires the concurrence of three elements: (1) control of the corporation by the stockholder or parent corporation; (2) fraud or fundamental unfairness imposed on the plaintiff; and (3) harm or damage caused to the plaintiff by the fraudulent or unfair act of the corporation (Roquel v. Philippine National Bank, GR 246270, 30 June 30, 2021).

In alter ego cases, the existence or nonexistence of fraud is immaterial because “the doctrine of alter ego is based upon the misuse of a corporation by an individual [or another corporation] for wrongful or inequitable purposes.”

Unlike in cases of fraud, there is no need to determine whether the defendants intended to deceive the plaintiff. What is analyzed is “how the corporation operated and the individual defendant’s relationship to that operation” that led to injustice or resulted in the disregard of a third party’s (i.e., plaintiff’s) rights. Rather than focusing on the intent of the defendants, it is the result of their actions that is subject to careful scrutiny (Roquel v. Philippine National Bank, GR 246270, 30 June 30, 2021).

An important application of the doctrine of piercing the corporate veil is in labor law when a corporation uses its separate personality to evade obligations to its employees. We will discuss this topic in succeeding articles.

The doctrine of piercing the corporate veil serves as a critical safeguard against the misuse of the corporate separate personality. However, it must be done with caution and done only when necessary to prevent injustice. It should not be used to unnecessarily expose the officers and stockholders of the corporation to unwarranted liabilities.

Euney Marie J. Mata-Perez is a CPA lawyer and managing partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A and tax lawyer, ranked as one of the top 100 lawyers of the Philippines by Asia Business Law Journal and is chairman of the Tax Committee of the Management Association of the Philippines. She acknowledges the contribution of Atty. Joshua Rizlan A. Simbillo in this column. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. Email the author at info@mtfcounsel.com or visit MTF website at www.mtfcounsel.com.