G.R. No.

108734 May 29, 1996

CONCEPT BUILDERS, INC. vs. THE NATIONAL LABOR RELATIONS

COMMISSION

Facts:

Petitioner Concept Builders, Inc. is a domestic corporation with principal office at 355
Maysan Road, Valenzuela, Metro Manila and is engaged in the construction
business. Private respondents were employed by said company as laborers,
carpenters and riggers. Private respondents were served individual written notices of
termination of employment by petitioner, that their contracts of employment had
expired and the project in which they were hired had been completed. However, at
the time of the termination of private respondent's employment, the project in which
they were hired had not yet been finished and completed. Petitioner had to engage
the services of sub-contractors whose workers performed the functions of private
respondents. Aggrieved, private respondents filed a complaint for illegal dismissal,
unfair labor practice and non-payment of their legal holiday pay, overtime pay and
thirteenth-month pay against petitioner. The Labor Arbiter rendered
judgment ordering petitioner to reinstate private respondents and to pay them back
wages equivalent to one year or three hundred working days. The Labor Arbiter
issued a writ of execution, and a second writ was issued but was not enforced. The
said special sheriff recommended that a "break-open order" be issued to enable him
to enter petitioner's premises so that he could proceed with the public auction sale of
the aforesaid personal properties. On November 6, 1989, a certain Dennis
Cuyegkeng filed a third-party claim with the Labor Arbiter alleging that the properties
sought to be levied upon by the sheriff were owned by Hydro (Phils.), Inc. (HPPI) of
which he is the Vice-President. On November 23, 1989, private respondents filed a
"Motion for Issuance of a Break-Open Order," alleging that HPPI and petitioner
corporation were owned by the same incorporator/stockholders. They also alleged
that petitioner temporarily suspended its business operations in order to evade its
legal obligations to them and that private respondents were willing to post an
indemnity bond to answer for any damages which petitioner and HPPI may suffer
because of the issuance of the break-open order.

Issue: Whether or not the break-open order be enforced against personal

property found in the premises of petitioner's sister company.

Held: YES. 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, his 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.

The conditions under which the juridical entity may be disregarded vary according to
the peculiar facts and circumstances of each case. No hard and fast rule can be
accurately laid down, but certainly, there are some probative factors of identity that
will justify the application of the doctrine of piercing the corporate veil, to wit:

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.

4. Methods of conducting the business. 13

The SEC en banc explained the "instrumentality rule" which the courts have applied
in disregarding the separate juridical personality of corporations as follows:

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 instances, 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 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.

The test in determining the applicability of the doctrine of piercing the veil of
corporate fiction is as follows:

1. 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. 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
rights; and

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

The absence of any one of these elements prevents "piercing the

corporate veil." In applying the "instrumentality" or "alter ego" doctrine,
the courts are concerned with reality and not form, with how the
 corporation operated and the individual defendant's relationship to that
operation.14

Thus the question of whether a corporation is a mere alter ego, a mere sheet or
paper corporation, a sham or a subterfuge is purely one of fact.

In this case, the NLRC noted that, while petitioner claimed that it ceased its business
operations on April 29, 1986, it filed an Information Sheet with the Securities and
Exchange Commission on May 15, 1987, stating that its office address is at 355
Maysan Road, Valenzuela, Metro Manila. On the other hand, HPPI, the third-party
claimant, submitted on the same day, a similar information sheet stating that its
office address is at 355 Maysan Road, Valenzuela, Metro Manila.

Furthermore, both information sheets were filed by the same Virgilio O. Casiño as

the corporate secretary of both corporations. It would also not be amiss to note that
both corporations had the same president, the same board of directors,
the same corporate officers, and substantially the same subscribers.

From the foregoing, it appears that, among other things, the respondent (herein
petitioner) and the third-party claimant shared the same address and/or premises.
Under this circumstances, (sic) it cannot be said that the property levied upon by the
sheriff were not of respondents.

Clearly, petitioner ceased its business operations in order to evade the payment to
private respondents of back wages and to bar their reinstatement to their former
positions. HPPI is obviously a business conduit of petitioner corporation and its
emergence was skillfully orchestrated to avoid the financial liability that already
attached to petitioner corporation.

Public Corporation vs Private Corporation

Public Corporation are those formed or organized for the government of a portion of
the State or any of its political subdivisions and which have for their purpose the
general good and welfare.

The TRUE TEST to determine the nature of a corporation is found in the relation of
the body to the State. Strictly speaking, a public corporation is one that is created,
formed or organized for political or governmental purposes with political powers to be
exercised for purposes connected with the public good in the administration of the
civil government.

Private Corporations are those formed for some private purpose, benefit, aim or
end. They are created for the immediate benefit and advantage of the individuals or
members composing it and their franchise may be considered as privileges
conferred by the State to be exercised and enjoyed by them in the form of the
corporation
Corporation by Estoppel

Corporation by Estoppel. All persons who assume to act as a corporation knowing it

to be without authority to do so shall be liable as general partners for all debts,
liabilities and damages incurred or arising as a result thereof: Provided, however,
That when any such ostensible corporation is sued on any transaction entered by it
as a corporation or on any tort committed by it as such, it shall not be allowed to use
its lack of corporate personality as a defense. Anyone who assumes an
obligation to an ostensible corporation as such cannot resist performance thereof on
the ground that there was in fact no corporation. (Section 20, RCC)

A corporation may exist on the ground of estoppel by virtue of the agreement,

admission or conduct of the parties such that they will not be permitted to deny the
fact of the existence of the corporation. It is neither a de jure nor de facto because of
serious defects in its incorporation or organization, unlike the de facto doctrine, it
does not involve a theory that the irregular corporation has acquired a corporate
status generally. It applies to the consequences of some particular transactions or
acts done in the corporate name by associates assuming to be a corporation.

Those which are so defectively formed as not to be either de jure or de facto

corporations but which are considered as corporations in relation only to those who
cannot deny their corporate existence due to their agreement, admission or conduct.

Stock Corporation vs Non-Stock Corporation

Stock corporations are those which have capital stock divided into shares and are
authorized to distribute to the holders of such shares, dividends, or allotments of the
surplus profits on the basis of the shares held (Section 3, RCC).

REQUISITES TO BE CLASSIFIED STOCK CORPORATIONS:

1. They have a capital stock dividend into shares; and
2. That they are authorized to distribute dividends or allotments as surplus profits to
its stockholders on the basis of the shares held by each of them. (Collector Of
Internal Revenue vs. Club Filipino, Inc. De Cebu, SCRA 312; May 31, 1968)

Capital vs Capital Stock

Capital – the properties and assets of the corporation that are used for its business
or operation

SEC. 12. Minimum Capital Stock Not Required of Stock Corporations. Stock
corporations shall not be required to have a minimum capital stock, except as
otherwise specifically provided by special law. (Sec. 12, RCC)
Shares of stock designate the units into which the proprietary interest in a
corporation is divided. They represent the proportionate integers or units, the sum of
which constitutes the capital stock of the corporation.

Note: Section 13 of the old Code as to the Amount of capital stock to be subscribed
and paid for the purposes of incorporation has been deleted in the RCC.

Authorized Capital Stock

Signifies the MAXIMUM amount fixed in the articles to be subscribed and paid-in or
secured to be paid by the subscribers. It may also refer to the maximum number of
shares that a corporation can issue.

Nationality of Corporation

Domicile Test
The nationality of the corporation is determined by the principal place of business of
the corporation.

Incorporation Test
Test applied in determining whether a corporation is domestic or foreign. If it is
incorporated in another state, it is a foreign corporation, while if it is registered under
Philippine laws, it is deemed a Filipino or domestic corporation irrespective of the
nationality of its stockholders.

Thus, a corporation registered under the Foreign Investments Act of 1991 (RA No.
7074) or the Trade Liberalization Law of 2000 (RA No. 8762) with 100% foreign
equity is considered a Filipino or domestic corporation and not foreign.

Control Test

In times of war and for purposes of security of the state, however, the “control test”
would apply in determining the corporate nationality, i.e., the citizenship of the
controlling stockholders determines the nationality of the corporation.

The Grandfather Rule:

The method by which the percentage of Filipino equity in a corporation engaged in

nationalized and/or partly nationalized areas of activities, provided for under the
Constitution and other nationalization laws, is computed, in cases where corporate
shareholders are present, by attributing the nationality of the second or even
subsequent tier of ownership to determine the nationality of the corporate
shareholder."4 Thus, to arrive at the actual Filipino ownership and control in a
corporation, both the direct and indirect shareholdings in the corporation are
determined.
The "Grandfather Rule" is applied specifically in cases where the corporation has
corporate stockholders with alien stockholdings, otherwise, if the rule is not applied,
the presence of such corporate stockholders could diminish the effective control of
Filipinos.

Foreign Investment Act of 1991

SEC. 3. Definitions. - As used in this Act:

a. The term "Philippine national" shall mean a citizen of the Philippines; or a

domestic partnership or association wholly owned by citizens of the Philippines; or a
corporation organized under the laws of the Philippines of which at least sixty
percent (60%) of the capital stock outstanding and entitled to vote is owned
and held by citizens of the Philippines; or a corporation organized abroad and
registered as doing business in the Philippines under the Corporation Code of which
one hundred percent (100%) of the capital stock outstanding and entitled to vote is
wholly owned by Filipinos or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a Philippine national and at
least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That where a corporation and its non-Filipino stockholders own
stocks in a Securities and Exchange Commission (SEC) registered enterprise, at
least sixty percent (60%) of the capital stock outstanding and entitled to vote of each
of both corporations must be owned and held by citizens of the Philippines and at
least sixty percent (60%) of the members of the Board of Directors of each of both
corporations must be citizens of the Philippines, in order that the corporation, shall
be considered a "Philippine national."