Continuation…… (Corp and Corporate Rehabilitation)

Combination of the two (2) tests

The Court then combined the two tests and declared that jurisdiction should be determined by
considering not only the status or relationship of the parties , but also the nature of the
question under controversy. This two-tier test was adopted in the recent case of Speed
Distribution, Inc. vs. Court of Appeals:

“To determine whether a case involves an intra-corporate controversy, and is to be heard

and decided by the branches of the RTC specifically designated by the Court to try and decide
such cases, two elements must concur:

1. The status or relationship of the parties; and

2. The nature of the question that is the subject of their controversy.

The first element requires that the controversy must arise out of intra-corporate or
partnership relations between any or all of the parties and the corporation, partnership,
or association of which they are stockholders, members or associates, between any or
all of them and the corporation, partnership or association of which they are
stockholders, members or associates, respectively, and between such corporation,
partnership or association and the State insofar as it concerns the individual franchises.
The second element requires that the dispute among the parties be intrinsically
connected with the regulations of the corporation. If the nature of the controversy
involves matters that are purely civil in character, necessarily the case does not involve
an intra-corporate controversy.

“Thus to be considered as intra-corporate dispute, the case:

a. Must arise out of intra-corporate or partnership relations, and

b. The nature of the question subject of the controversy must be such that it is
intrinsically connected with the regulation of the corporation or the enforcement of
the parties’ rights and obligations under the Corporation Code and the internal
regulatory rules of the Corporation. So long as these two criteria are satisfied, the
dispute is intra-corporate and the RTC, acting as a special commercial court has
jurisdiction over it.

Note: Please read: Vitaliano Aguirre II, et al., vs. FOB+7 Inc. et al.G.R. No. 170770, January 9,
2013.

Effects of dissolution of corporation

The corporation Code protects, among others, the rights and remedies of corporate actors
against other corporate actors. The statutory provision assures an aggrieved party that the
corporation’s dissolution will not impair much less remove, his/her rights or remedies against
the corporation, its stockholders, directors or officers. It also states that corporate dissolution
will not extinguish any liability already incurred by the corporation, its stockholders, directors or
officers. In short, it preserves a corporate actor’s cause of action and remedy against another
corporate actor. In so doing, it also preserves the nature of the controversy between the parties
as an intra-corporate dispute.

The dissolution of the corporation simply prohibits it from continuing its business. However,
despite such dissolution, the parties involved in the litigation are still corporate actors. The
dissolution does not automatically convert the parties into total strangers or change their intra-
corporate relationships. Neither does it change or terminate existing causes of action, which
arose because of the corporate ties between the parties. Thus, a cause of action involving an
intra-corporate controversy remains and must be filed as an intra-corporate dispute despite the
subsequent dissolution of the corporation.

Nature and liabilities of corporation

Basic is the rule in corporation law that a corporation is a juridical entity which is vested with
legal personality separate and distinct from those acting for and in its behalf and, in general,
from the people comprising it. Following this principle, obligations incurred by the corporation,
acting through its directors, officers and employees, are its sole liabilities. A director, officer or
employee of a corporation is generally not held personally liable for obligations incurred by the
corporation. Nevertheless, this legal fiction may be disregarded if it is used as a means to
perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, or to confuse legitimate issues.

Note: Please read: Garcia vs. SSS Legal & Collection, G.R. No. 170735, Dec. 17, 2007.

Solidary liability of officers for liabilities of a corporation

Solidary liability will then attach to the directors, officers or employees of the corporation in
certain circumstances, such as:

1. When directors and trustees or, in appropriate cases, the officers of a corporation:

a) Vote for or assent to patently unlawful acts of the corporation;

b) Act in bad faith or with gross negligence in directing the corporate affairs; and
c) Are guilty of conflict of interest to the prejudice of the corporation, its stockholders or
members, and other persons.
 2. When a director or officer has consented to the issuance of watered stocks or who,
having knowledge thereof, did not forthwith file with the corporate secretary his written
objection thereto;
3. When a director, trustee or officer has contractually agreed or stipulated to hold himself
personally and solidarily liable with the corporation; or
4. When a director, trustee or officer is made, by specific provision of law, personally liable
for his corporate action.

Before a director or officer of a corporation can be held personally liable for corporate
obligations, however, the following requisites must concur:

a. The complainant must allege in the complaint that the director or officer assented to
patently unlawful acts of the corporation, or that the officer was guilty of gross
negligence or bad faith; and
b. The complainant must clearly and convincingly prove such unlawful acts, negligence or
bad faith.

Note: Please read: Francisco vs. Mallen, Jr., G.R. No. 173169, Sept. 22, 2010, 631 SCRA 118.

Rights of stockholders; preferred shares cannot vote; reason

One of the rights of stockholders is the right to participate in the control or management of the
corporation. This is exercised through his vote in the election of directors because it is the
board of directors that controls or manages the corporation. In the absence of provisions in the
articles of incorporation denying voting rights to preferred shares, preferred shares have the
same voting rights as common shares. But, preferred shareholders are often excluded from any
control that is, deprived of the right to vote in the election of directors and on other matters, on
the theory that the preferred shareholders are merely investors in the corporation for income
in the same manner as bondholders. In fact, under the Corporation Code, only preferred or
redeemable shares can be deprived of the right to vote.

Common shares cannot be deprived of the right to vote in any corporate meeting, and any
provision in the articles of incorporation restricting the right of common shareholders to vote is
invalid.

Considering that common shares have voting rights which translate to control, as opposed to
preferred shares which usually have no voting rights, the term “capital” in Section 11, Article XII
of the Constitution refers only to common shares. However, if the preferred shares also have
the right to vote in the election of directors, then the term “capital” shall include such preferred
shares because the right to participate in the control or management of the corporation is
exercised through the right to vote in the election of directors.

In short, the term CAPITAL in Section 11, Article XII of the Constitution refers only to SHARES OF
STOCK that can vote in the election of directors.
This interpretation is consistent with the intent of the framers of the Constitution to place in
the hands of Filipino citizens the control and management of public utilities. As revaled in the
deliberations of the Constitutional Commission, “capital” refers to the voting stock or
controlling interest of a corporation.

Piercing the corporate veil

Under the variation of the doctrine of piercing the veil of corporate fiction, when two or more
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.

While the conditions for the disregard of the juridical entity may vary, the following are some
probative factors of identity that will justify the application of the doctrine of piercing the
corporate veil:

1. Stock ownership by one or common ownership of both corporations;

2. Identity of directors and officers;
3. The manner of keeping corporate books and records; and
4. Methods of conducting the business.

Note: Please read: Concept Builders, Inc. vs. NLRC, 326 Phil. 955, 1996.

Doctrine of piercing the corporate veil (Test in determining applicability)

The principle of piercing the veil of corporate fiction and the resulting treatment of two related
corporations as one and the same juridical person with respect to a given transaction, is
basically applied only to determine established liability; it is not available to confer on the court
jurisdiction it has not acquired, in the first place, over a party not impleaded in a case.

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 that corporation and its property would
infringe on its right to due process. 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. Before this doctrine can be applied, the court must first have jurisdiction over the
corporation.
Tests evolved to determine applicability of piercing doctrine.

The tests in determining the applicability of the doctrine of piercing the veil of corporate fiction
are as follows:

1. Control not mere majority or complete stock control, but complete domination, not only
of the 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. 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 acts in contravention of plaintiff’s legal right; and

3. The aforesaid control and breach of duty must proximately caused the injury or unjust
loss complained of.

Note: Please read: Heirs of Ramon Durano Sr. vs. Uy, 344 SCRA 238, 2000.

It has been held that the existence of the corporate entity does not shield from prosecution the
corporate agent who knowingly and intentionally causes the corporation to commit the crime.
The corporation obviously acts, and can act only by and through its human agents, and it is their
conduct which the law must deter. The employee or agent of a corporation engaged in unlawful
business naturally aids and abets in the carrying on of such business and will be prosecuted as
principal if, with knowledge of the business, its purpose and effect, he consciously contributes
his efforts to its conduct and promotion (illegal recruitment in this case), however slight his
contribution may be.

Please read: The Executive Secretary vs. CA, 429 SCRA 81, 2004.