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Doctrine of Separate Personality

Nature of the Doctrine

- It dictates that a corporation is invested by law with a personality separate and distinct from
those of the persons composing it. (Queensland-Tokyo Commodities, Inc., et al. vs. Thomas
George)
- The general rule is that a corporation has a personality separate and distinct from that of its
stockholders and other corporations to which it may be connected. (Suldao vs. Cimech
System Construction, Inc.)

What is the consequence of the doctrine?

- Because of such distinct personality, obligations incurred by corporate officers acting as


corporate agents are not theirs but the direct accountabilities of the corporation they
represent. However, solidary liabilities may at times be incurred by corporate officers.
(Yasuma vs. Heirs of de Villa)
- Ownership by a single or small group of stockholders of nearly all of the capital stock of the
corporation is not itself a sufficient ground to disregard the separate corporate personality.
Thus, obligations incurred by corporate officers, acting as corporate agents, are direct
accountabilities of the corporation they represent. (Shrimp Specialist, Inc. vs. Fuji-Triumph
Agri-Industrial Corp.)

Doctrine of Piercing the Veil Corporate Fiction

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

- Under this doctrine, the court looks at the corporation as a mere collection of individuals or
an aggregation of persons undertaking business as a group, disregarding the separate
juridical personality of the corporation unifying the group.
- Another formulation of this doctrine is that 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 as one and the same. (Pantranco Employees
Association vs. NLRC)
- The corporate existence may be disregarded where the entity is formed or used for non-
legitimate purposes, such as to evade a just and due obligation, or to justify a wrong to
shield or perpetrate fraud or to carry out similar or inequitable considerations, other
unjustifiable aims or intentions, in which case, the fiction will be disregarded and the
individuals composing it and the two corporations will be treated as identical. (Livesey vs.
Binswanger)
- It is a fundamental principle of corporation law that a corporation is an entity separate and
distinct from its stockholders and from other corporations to which it may be connected.
But this separate and distinct personality of a corporation is merely a fiction created by law
for convenience and to promote justice. So, when the notion of separate juridical
personality is used to defeat public convenience, justify wrong, protect fraud or defend
crime, or is used as a device to defeat the labor laws, this separate personality of the
corporation may be disregarded or the veil of corporate fiction pierced. This is true likewise
when the corporation is merely an adjunct, a business conduit or an alter ego of another
corporation.
- Where 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
of the instrumentality may be disregarded. The control necessary to invoke the rules is not
majority or even complete stock control but such domination of finances, policies, and
practices that the controlled corporation has, so to speak, no separate mind, will or
existence of its own, and is but a conduit for its principal. It must be kept in mind that the
control must be shown to have been exercised at the time of the acts complained of took
place. Moreover, the control and breach of duty must proximately cause the injury or unjust
loss for which the complaint is made. (Pacific Rehouse Corp. vs. CA)

What is the rationale for the doctrine?

- It is an equitable doctrine developed to address situations where the separate corporate


personality of a corporation is abused or used for wrongful purposes.

What is the effect if the veil is pierced?


- It shall result in the treatment of two related corporations as one and the same juridical
person with respect to a given transaction. As such, the liability of one may be imposed on
the other. (Pacific Rehouse)

What factors would be considered by the Court in piercing the veil of two corporations?

- The confluence of the following factors is needed in piercing the veil:


1. A first corporation is dissolved;
2. The assets of the first corporation is transferred to a second corporation to avoid
financial liability of the first corporation; and
3. Both corporations are owned and controlled by the same persons such that the
second corporation should be considered as a continuation and successor of the
first corporation.

What are the factors of identity that may be considered in the application of the doctrine?

- In the case of Heirs of Fe tan Uy, et al., the following factors are considered:
1. Stock ownership by one or common ownership of both coporations;
2. Identity of directors and officers;
3. The manner of keeping corporate books and records; and
4. Methods of conducting the business.

What is the alter-ego test?

- Where 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
of the instrumentality may be disregarded. The control necessary to invoke the rule is not
majority or even complete stock control but such domination of finances, policies and
practices that the controlled corporation, has to speak, no separate mind, will or existence
of its own, and is but a conduit of its principal. It must be kept in mind that the control must
be shown to have been exercised at the time the acts complained of took place. Moreover,
the control and breach of duty must proximately cause the injury or unjust loss for which
the complaint is made. (Pacific Rehouse)

What are the three tests to establish the alter-ego doctrine?


- Control, fraud and harm:
1. Control Test – the control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy and business practice 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. Fraud Test – such control must have been used by the defendant to commit fraud,
or wrong, to perpetuate the violation of a statutory or other positive legal duty, or
dishonest and unjust act in contravention of plaintiff’s legal right; and
3. Harm Test – the aforesaid control and breach of duty must have proximately caused
the injury or unjust loss complained of.
- The absence of any one of these elements prevents the piercing of the corporate veil in
applying the instrumentality or alter ego doctrine. Hence, all three elements should concur
for the alter ego doctrine to be applicable.
- The 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.
- The existence of interlocking directors, corporate officers and shareholders is not enough
justification to pierce the veil of corporate fiction in the absence of fraud or other public
policy considerations.
- The mere fact that the businesses of two or more corporations are interrelated is not a
justification for disregarding their separate personalities, absent sufficient showing that the
corporate entity was purposely used as a shield to defraud creditors and third persons of
their rights. (Umali vs. CA)
- The piercing of the veil of corporate fiction is frowned upon and can only be done if it has
been clearly established that the separate and distinct personality of the corporation is used
to justify a wrong, protect fraud, or perpetrate a deception. (Heirs of Fe Tan Uy)

What is the rationale for this rule?

- The wrongdoing must be clearly and convincingly established, it cannot be presumed.


Otherwise, an injustice that was never unintended may result from an erroneous
application. (PNB vs. Andrada Electric & Engineering Co.)

Can the doctrine be used to determine jurisdiction?


- No, piercing the veil of corporate entity applies to determine liability not of jurisdiction. This
is so because the doctrine of piercing the veil of corporate fiction comes to play only during
the trial of the case after the court has already acquired jurisdiction over the corporation.
Hence, before this doctrine can be applied, based on the evidence presented, it is
imperative that the court must first have jurisdiction over the corporation.
- If the court has no jurisdiction over the corporation, it follows that the court has no business
in piercing its veil of corporate fiction because such action offends the corporation’s right to
due process. (Pacific Rehouse)
- Piercing the veil of corporate fiction is basically applied only to determine established
liability; it is not available to confer on the court a jurisdiction it has not acquired, in the first
place, over a party not impleaded in a case. Elsewise put, a corporation not impleaded in a
suit cannot be subject to the court’s process of piercing the veil of its corporate fiction. In
that situation, the court has not acquired jurisdiction over the corporation and, hence, any
proceedings taken against the corporation and its property would infringe on its right to due
process. (Pacific Rehouse)

Doctrine of Apparent Authority

Nature of the Doctrine

- The doctrine provides that a corporation will be stopped from denying the agent’s authority
if it knowingly permits one of its officers or any other agent to act within the scope of an
apparent authority, and it holds him out of the public as possessing the power to do those
acts. (Advance Paper Corp. vs. Arma Traders Corp)

When will the doctrine apply?

- If a corporation knowingly permits one of its officers or any other agent to act within the
scope of an apparent authority, it holds the agent out to the public as possessing the power
to do those acts; thus, the corporation will, as against anyone who has in good faith dealt
with it through such agent, be stopped from denying the agent’s authority. (Rural Bank of
Milaor vs. Ocfemia)
- A banking corporation is liable to innocent third persons where the representation is made
in the course of its business by an agent acting within the general scope of his authority
even though, in the particular case, the agent is secretly abusing his authority and
attempting to perpetuate fraud upon his principal or some person, for his own ultimate
benefit. (Prudential Bank and Trus Co. vs. Abasolo)
- Inasmuch as a corporate president is often given general supervision and control over
corporate operations, the strict rule that said officer has no inherent power to act for the
corporation is slowly giving way to the realization that such officer has certain limited
powers in the transaction of the usual and ordinary business of the corporation. In the
absence of a charter or bylaw provision to the contrary, the president is presumed to have
the authority to act within the domain of the general objectives of its business and within
the scope of his or her usual duties. (Advance Paper)

When will the doctrine not apply?

- If the principal did not commit any acts or conduct which a third party knew and relied upon
in good faith as a result of the exercise of reasonable prudence. Moreover, the agent’s acts
or conduct must have produced a change of position to the third party’s detriment. (Banate
vs. Phil. Countryside Rural Bank, Inc.)

What act should be considered in considering the application of the doctrine?

- Apparent authority is determined only by the acts of the principal and not by the acts of the
agent – the principal is not responsible where the agent’s own conduct and statements have
created the apparent authority. (Sargasso Construction and Development Corp, et al. vs.
Philippine Ports Authority)
- Apparent authority is determined only by the acts of the principal and not by the acts of the
agent. (Banate)

Doctrine of Equality of Shares

What is this doctrine?

- All stocks issued by the corporation are presumed equal with the same privileges and
liabilities, provided that the AoI is silent on such differences. (CIR vs. CA)

Doctrine of Limited Liability

What is this doctrine?


- The prevailing rule is that a stockholder is personally liable for the financial obligations of
the corporation up to the extent of his unpaid subscription. (Halley vs. Printwell, Inc.)

What is the rationale?

- The owners of a corporate organization are its stockholders and they are to be distinguished
from its directors and officers. In a corporation, the management of its business is generally
vested in its board of directors, not its stockholders. Stockholders are basically investors in a
corporation. They do not have a hand in running the day-to-day business operations of the
corporation unless they are at the same time directors or officers of the corporation.
- Before a stockholder may be held criminally liable for acts committed by the corporation, it
must be shown that he had knowledge of the criminal act committed in the name of the
corporation and that he took part in the same or gave his consent to its commission,
whether by act or inaction.

Doctrine of Corporate Opportunity

What is this doctrine?

- Sec. 31 of the Corporation Code expressly lays down the officers’ liability for damages
arising from their gross negligence or bad faith in directing corporate affairs.

Trust Fund Doctrine

What is this doctrine?

- It enunciates a rule that the property of a corporation is a trust fund for the payment of
creditors, but such property can be called a trust fund only by way of analogy or methapor.
As between the corporation itself and its creditors it is a simple debtor, and as between its
creditors and stockholders its assets are in equity fund for the payment of its debts. (Halley)
- Subscriptions to the capital of a corporation constitute a fund to which creditors have a right
to look for satisfaction of their claims and that the assignee in insolvency can maintain an
action upon any unpaid stock subscription in order to realize assets for the payment of its
debts. (Velasco vs. Poizat)

What is the scope of the doctrine?


- It is not limited to reaching the stockholder’s unpaid subscriptions. The scope of the
doctrine when the corporation is insolvent encompasses not only the capital stock, but also
other property and assets generally regarded in equity as a trust fund for the payment of
debts.
- A corporation has no legal capacity to release an original subscriber to its capital stock from
the obligation of paying for his shares, in whole or in part, without a valuable consideration,
or fraudulently, to the prejudice of creditors. The creditor is allowed to maintain an action
upon any unpaid subscriptions and thereby steps into the shoes of the corporation for the
satisfaction of its debt.
- To make out a prima facie case in a suit against stockholders of an insolvent corporation to
compel them to contribute to the payment of its debts by making good unpaid balances
upon their subscriptions, it is only necessary to establish that the stockholders have not in
good faith paid the par value of the stocks of the corporation. (Halley)
- The doctrine considers the subscribed capital as a trust fund for the payment of the debts of
the corporation, to which the creditors may look for satisfaction. (NTC vs. CA)
- The doctrine backstops the requirement of unrestricted retained earnings to fund the
payment of the shares of stocks of the withdrawing stockholders. Under the doctrine, the
capital stock, property, and other assets of a corporation as regarded as equity in trust for
the payment of corporate creditors, who are preferred in the distribution of corporate
assets.
- The creditors of a corporation have the right to assume that the board of directors will not
use the assets of the corporation to purchase its own stock for as long as the corporation
has outstanding debts and liabilities. There can be no distribution of assets among the
stockholders without firs paying corporate debts. Thus, any disposition of corporate funds
and assets to the prejudice of creditors is null and void. (Turner vs. Lorenzo Shipping Corp.)

Business Judgment Rule

What is BJR?

- It provides that the BoD or Trustees has the sole authority to determine policies, enter into
contracts, and conduct the ordinary business of the corporation with the scope of its
charter. (Filipinas Port Services vs. Go)
- As to its corporate and management decisions, the state will generally not interfere with the
same. Questions of policy and of management are left to the honest decision of the officers
and directors of a corporation, and the courts are without authority to substitute their
judgment for the judgment of the board of directors. The board is the business manager of
the corporation, and so long as it acts in good faith, its orders are not reviewable by the
courts. (PSE vs. CA)

What is the rationale for this rule?

- Courts and other tribunals are wont to override the business judgment of the board mainly
because, courts are not in the business of business, and the laissez faire rule or the free
enterprise system prevailing in our social and economic set-up dictates that it is better for
the State and its organs to leave business to the businessmen; especially so, when courts are
ill-equipped to make business decisions.

What is the legal basis?

- Sec 23 of the Corporation Code provides that unless otherwise provided therein, the
corporate powers of all corporations formed under the Code shall be exercised, all business
conducted and all property of the corporation shall be controlled and held by a board of
directors.
- The social contract in the corporate family to decide the course of the corporate business
have been vested in the board and not with courts. (Yong vs. Tiu)

What is the legal consequence?

- The courts cannot undertake to control the discretion of the board of directors about
administrative matters as to which they have legitimate power of action. Thus, the court has
no jurisdiction to interfere with the management of the corporation by the BoD, and the
enactment of a resolution by the members of the BoD of the corporation. (Asso. Of Int’l
Shipping Lines, Inc. vs Phil. Ports. Authority)

Ultra Vires Doctrine

What is this doctrine?


- An ultra vires act is one committed outside the object for which a corporation is created as
defined by law of its organization and therefore beyond the power conferred upon it by law.
The term ultra vires is distinguished from an illegal act for the former is merely voidable
which may be enforced by performance, ratification, or estoppels, while the latter is void
and cannot be validated. (Atrium Mngt. Corp. vs. CA)