Notes
Application of the rules emanating from the
CORPORATION LAW
Villanueva
CHAPTER 3
ATTRIBUTE OF SEPARATE JURIDICAL PERSONALITY:
The corporation is primarily a medium for commercial
pursuits.
III. SEPARATE JURIDICAL PERSONALITY AND
THE DOCTRINE OF PIERCING THE VEIL OF
CORPORATE FICTION
(1) Main doctrine: A corporation has a
personality separate and distinct from its
directors or trustees, officers, its
shareholders or members. Article 44,
section 2, NCC)
Assets: assets of shareholders are not assets
of the corporation (Situs v Asiatrust)
Liabilities: corporation will not answer
liabilities of its shareholders and vice versa.
(General Credit Corp v Alsons)
Purpose of legal fiction:
For convenience and to subserve the ends of
justice
a. Doctrines emanating from the primary
attribute of separate juridical personality
1. DOCTRINE OF LIMITED LIABILITY:
Shareholders/members cannot be held liable
for the liabilities of the corporation, except to
the extent of their investments or promised
investments
2. AGENCY LAW PRINCIPLE: directors/trustees,
officers and other corporate agents do not
become personally liable for corporate
contracts that they enter into on behalf of the
corporation
Debt or credit: if of shareholders, not of
corporation and vice versa
Obigations: obligations of a shareholder in
one corporation cannot be offset from the
obligation of a shareholder in a second
corporation.
Consequence of a corporation’s separate
personality:
Consent made through its representatives is
not consent of the representatives, personally
b.
primary doctrine:
1. Majority Equity Ownership and Interlocking
Directorship, Officership or Shareholders
Mere ownership by a single shareholder or by
another corporation of al or nearly all the
caporal stock is not, by itself, sufficient ground
for disregarding the separate corporate
personality. There must be fraud or alter-ego
elements. Pacific v CA
Ownership of a majority of capital stock and
the fact that majority of directors of a
corporation are the directors of another
corporation creates no employer-employee
relationship with the latter’s employees.
Freyssinet v Lapuz
Majority of the stockholders cannot be held
personally liable for the attorney’s fees
charged by a lawyer for representing the
corporation. Laperal v CA
Having 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. Velarde v Lopez
2. On being a corporate officer or shareholder:
Being a corporate officer or shareholder does
not by itself make one’s property also that of
the corporation, and vice versa. Good earth v
CA
It is hornbook law that corporate personality
is a shield against personal liability of its
officers. Intestate estate of Alexander v CA
The president of the corporation which is
liable for the accident caused by its truck
driver cannot be held solidarily liable for the
judgment obligation arising from quasi-delict.
Secosa v Suarez
When the compulsory counterclaim filed
against corporate officers for their alleged
fraudulent act indicate that such corporate
officers are indispensable parties in the
litigation, the original inclusion of the
corporation in the suit does not thereby allow
the denial of a specific counter-claim being
filed to make the corporate officers personally
liable. Lafarge v Continental Cement
3. On privileges enjoyed
Tax exemption clause of the corporation
cannot be extended to controlling
shareholders. Manila Gas v CIR
4. On suits for or against the corporation
A corporation has no legal standing to file suit
for recovery of parcels of land owned by its
members in individual capacity. Sulo v
Araneta
Shareholders have no standing to intervene in
a collection case covering the loans of the
corporations. Shareholder’s interest in the
corporate entity is purely inchoate. Saw v CA
A corporate defendant against whom a writ of
possession has been issued, cannot use the
fact that it has obtained controlling equities in
the corporate plaintiffs to suspend its
enforcement. Silverio v Filipino Business
Shareholders have no standing to recover
damages arising from the wrongful
attachment of the corporation’s assets.
Stronghold Insurance v Cuenca
(2) Piercing the veil of corporate fiction
a. Source of Incantation: US v
Milwaukee
Individuals composing the corporation will be
treated as identical, if the corporate entity is
being used as a cloak or cover for fraud or
illegality, justification for a wrong, or as an
alter-ego, an adjunct, or a business conduit
for the sole benefit of the shareholders.
Gochan v Young
The court has pierced the corporate veil to
ward off a judgment credit, to avoid inclusion
of corporate assets as part of the estate of the
decedent, to escape liability arising for a debt,
or to perpetuate fraud and/or confuse
legitimate issues either to promote or to
shield unfair objectives to cover up an
otherwise blatant violation of the prohibition
against forum shopping. PNB v Andrada
When the notion of legal entity is used to
defeat public convenience, justify wrong,
protect fraud, or defend a crime, the law will
regard the corporation as an association of
persons. The wrongdoing must be clearly and
convincingly established, it cannot be
presumed. Suldao v Cimech
b. Classification of Piercing Cases
• Fraud piercing
Entity is used to commit a
crime, undertake fraud, do a
wrong or to evade the
consequences of one’s
criminal or fraudulent acts.
• Alter-ego piercing
Entity is merely a farce since it
is merely an alter-ego,
business conduit or
instrumentality of a person or
another entity
• Equity piercing / Defeat of
public convenience
Inconsistent with the business
purpose or merely confuse
legitimate issues.
Corporation is used as a
vehicle for the evasion of
existing obligation.
c. Objectives and effects of the
application of the piercing doctrine
Main effect: shareholders are held personally liable
for the acts and contracts of the corporation Republic
v Mega Pacific
When two business enterprises are owned and
controlled by the same parties, both law and equity,
when necessary to protect rights of third parties,
disregard the legal fiction. General Credit v Alsons
1. Recent attempts to narrow the
objectives for availing of piercing
Piercing is not allowed unless the remedy
sought is to make the officer or another
corporation pecuniarily liable for
corporate debts. Indophil v Calica
Rationale of piercing:
To remove the barrier between the
corporation and the persons comprising it
to thwart the fraudulent schemes of those
who use the corporate personality.
Reverse Piercing:
a. Outsider reverse: piercing occurs
when a party with a claim against an
 individual or corporation attempts to
be repaid with the assets of a
corporation owned or substantially
controlled by the defendant
4. Not applicable to theorize or to
b. Insider reverse piercing: the
controlling members will attempt to
ignore the corporate fiction in order
to take advantage of a benefit
available to the corporation, such as
an interest in a lawsuit or protection
of persona assets. IAME v Litton
2. Applicable to Third Parties
Respondents are not shareholders of
record does not make them non-parties,
since it is alleged that the corporations
are mere alter-egos of the director-
petitioner’s fiduciary duty to FGSRC.
Corporate entity will be pierced if used to
cloak fraud, justify a wrong or used as an
alter-ego for the benefit of shareholders.
Gochan v Young
3. Piercing has only res judicata effect
Res judicata- has already been judicially
decided
Application of the doctrine to a particular
case does not deny the corporation of
legal personality for any and all purposes,
but only for the particular transaction or
instance, or the particular obligation for
which the doctrine was applied. Koppel v
Yatco
d. PIERCING DOCTRINE as an Equitable
Remedy
1. It is a remedy of last resort.
Not available when other remedies are
still available. Umali v CA
2. Available only to prevent fraud or to
achieve an equitable end.
Meant to prevent fraud. Cannot be used
to perpetrate fraud or a wrong. Araneta v
Tuason
3. Party invoking the piercing doctrine must
have a “victim standing”.
Being merely an equitable remedy,
employment of the piercing doctrine can
only be for the protection of the interests
of innocent third persons dealing with the
corporate entity which the law aims to
protect by this doctrine. Traders Royal
Bank
advance/create ne rights or interest.
Piercing the veil cannot be availed of
under a theory of co-ownership to justify
continued use and possession by
shareholders of corporate properties.
Boyer-Roxas v CA
Piercing cannot be availed of to dislodge
from SEC’s jurisdiction on the ground that
the petitioning individuals be treated as
real petitioners to the exclusion of the
petitioning corporate debtor. Doctrine
only applies on cases of fraud, etc. Union
Bank v CA
Application of the piercing of the
subsidiary company to merge with the
holding company cannot be allowed to
support a theory of set-off or
compensation, there being no allegation
of or proof of fraud. Nische v PCI Bank
An employee who retires and avails of her
retirement benefits, but continued as a
consultant with affiliate companies,
cannot employ piercing in order to treat
her stint with the affiliate companies as
part of her employment with the main
company she retired from- there is no
fraud or employment of unfair shielding.
Rivera v United Laboratories
Piercing can be applied where clear
evidence support the fact that a
corporation’s affiliates have received
large amounts which became the
consideration for the company’s
execution of a real estate mortgage over
its properties.
Piercing cannot be used to justify service
of summons on the subsidiary to be
binding on the parent company unless the
subsidiary is but a business conduit or
there is fraud. Luzon Dev. Group v
Bridgestone
 5. Piercing must therefore be based on
CLEAR EVIDENCE
It is eementary that the wrongdoing cannot
be presumed and must be clearly and
convincingly established. PNB v Andrada
Clear and convincing evidence: degree of
proof which produces in the mind of the court
a firm belief or conviction as to the allegation
sought to be established. It is adduced to
overcome a prima facie case or a disputable
presumption.
6. Piercing is a power belonging to the
courts and cannot be assumed
improvidently by a sheriff Cruz v Dalisay
(3) Fraud Piercing Cases
a. Corporate fiction used to do wrong or evade
consequences thereof:
When a shareholder, who has absolute
control, enters into a contract with another
corporation through fraud and false
representations, such shareholder shall be
liable solidarily with co-defendant
corporation. NAMARCO v Associated Finance
Mere allegation of fraud or bad faith, without
evidence supporting such claims cannot
warrant the piercing. DBP v CA
Attempt to make security agencies appear as
two separate entities, when in reality they
were but one is not permitted. Enriquez
Security v Cabotaje
Piercing will be applied if there is indubitable
link between a CBB’s cosure and re-emerging
in the person of Binswanger. Livesey v
Binswanger
Courts has the responsibility to uphold the
doctrine of separate entity, concomitant to
piercing. Hence, the application of piercing
should be done with caution. Pacific v CA
b. Shell or Fictitious company
Fraudulent or may also sere as fronts for
government officials: Corrupt government
officials creating a fictitious company that will
serve as a vehicle to secure contract awards.
Republic v Mega Pacific
c. Guiding Principles in Fraud Cases:
• Fraud or evil-motive
• Corporate fiction is used as a
means to commit fraud or
avoid the consequences
thereof
• Main action should seek
enforcement of pecuniary
claims pertaining to the
corporation against corporate
officers or shareholders
Probative Factors for Fraud Piercing:
Corporate fiction is used as a means to commit fraud
or avoid the consequences of one’s unlawful or
wrongful acts. Concept Builders v NLRC
Absence of the elements prevents the piercing of the
corporate veil. Lim v CA
Two corporations may engaged in the same business,
share same address, or have interlocking
incorporators, directors or officers but absence of
fraud or pubic policy consideration, does not warrant
piercing. McLeod v NLRC
Mere substantial identity of incorporators does not
imply fraud nor warrant the piercing of the corporate
veil. Laguio v NLRC
That a corporation owns all of the stocks of another
corporation does not amount to fraud per se, and
does not justify their being treated as one entity Nisce
v Equitable PCI Bank
(4) Alter Ego Piercing Cases:
a. Using the corporation as a mere conduit or
alter ego
Capital stock is owned by one person and functions
only for the benefit of such individual owner, the
corporation and the individual is deemed the same.
Arnold v Willets
When the corporation is merely an adjunct, business
conduit or alter ego of another corporation, the
fiction of separate and distinct corporation entities
should be disregarded. Tan Boon Bee v Jarencio
Alter ego piercing does not require establishing fraud
or wrongdoing, but only that the corporate
personality has been used as an instrumentality for
the personal agenda of its controlling shareholder.
Lipat v Pacific Banking Corp.
 b. Xxx
c. Mixing-up operations of two companies;
disrespect to the corporate entity
Employment of same workers, single place of
business, etc. may indicate alter ego situation and
justify the Court of Industrial Relations to retain
jurisdiction over the labor case. La Campana v
Kaisahan ng Manggagawa
Mixing of personal accounts with corporate bank
accounts would authorize piercing. Ramirez v Bank of
America
Where 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 persons, disregard their separate legal
fictions and treat the as identical. Sibagat v Garcia
When a foreign parent company leased a large parcel
of land purposely for the benefit of its subsidiary,
which took over possession of the leased premises,
the subsidiary was a mere alter ego. Mariano v Petron
When a corporation lawfully terminates its employees
based on ceasing of operations, the terminated
employees cannot make a sister company liable for
their claims. Ownership of one corporation of all or a
great majority of stocks of another corporation and
their interlocking directorates may serve indicia of
control, by themselves and without more, they are
insufficient to establish an alter ego relationship that
will justify the puncturing of the latter’s corporate
cover. Zambrano v PCMC
A subsidiary company’s separate corporate
personality may be disregarded only when the
evidence shows that such separate personality was
used by its parent or holding corporation to
perpetrate fraud or evade an existing obligation.
Maricalum v Florentino
d. Guiding Principles in Alter Ego Cases
a. Corporate fiction is raised to confuse
• Doctrine applies even in the absence of evil
intent, because of the direct violation of a
central corporate law principle of separating
ownership from management.
• Doctrine in such cased is based on estoppel: if
shareholders do not respect the separate
entity, others also cannot also be expected to
be bound by the separate juridical entity.
• Piercing in alter ego cases may prevail even
when no monetary claims are sought to be
enforced against the shareholders or officers.
Probative factors in Alter Ego Piercing:
Instrumentality or Control Test requires mere
majority or complete stock control, but
compete domination of finances, policy and
business practices with respect to the
transaction in question. California v Advanced
Tech System
Mere existence of a parent-subsidiary
relationship between two corporation or that
one corporation is affiliated with another
does not by itself allow alter ego piercing.
Koppel v Yatco
Just because two foreign companies came
from the same country and closely worked
together on certain projects would the
conclusion arise that one was the conduit of
the other, thus piercing the veil of corporate
fiction. Marubeni v Lirag
Use of a controlling shareholder’s initials in
the corporate name is not sufficient reason to
pierce, since by that practice alone does it
mean that the said corporation is merely a
dummy of the individual shareholder,
provided such act is lawful. LBP v CA
If used to perform legitimate functions, a
subsidiary’s separate existence shall be
respected, and the liabilities of the parent
corporation and the subsidiary will be
confined to those arising in their respective
business. Even when the parent corporation
agreed to the terms to support a standby
credit agreement in favor of the subsidiary,
does not mean that its personality has
merged with that of the subsidiary. MR
Holdings v Bajar
(5) EQUITY PIERCING: “Defeat of Public
Convenience”
legitimate issues
Where employee in the mother company was
detailed/assigned to a sister company
whereat the employee died by reason of
work-related illness, and workmen’s
compensation benefits were sought against
the sister company, there would be proper
basis to pierce the veil of corporate fiction to
treat the two companies as one to allow
jurisdiction over the case to be retained by
the Workmen’s Compensation Commission to
rule on the defense of the lack of employer-
 employee relationship. The separate juridical
personality should not be used to confuse
legitimate issues. Telephone Engineering v
WCC
b. Raise Lega Technicalities
A complaint for unfair labor practice filed
against the President and controlling
shareholder and the judgment for
reinstatement and damages was in the name
of company. The judgment can be enforced
against the company and its properties on the
ground of equity piercing. Cannot be
remanded for it is contrary to speedy
adjudication of labor cases disregarding such
technicalities. Emilio Cano v CIR
Where the main purpose in forming the
corporation was to evade one’s subsidiary civil
liability for damages in a criminal case, the
corporation may not be heard to say that it
has a personality separate and distinct from
its members, because to allow it to do so
would be a shield to further an end subversive
justice. Palacio v Fely
Where a debtor registers his residence to a
family corporation in exchange of shares, and
continues to live therein, then the separate
juridical personality may be disregarded.
PBCom v CA
Where corporate fiction was used to
perpetrate social injustice or as a vehicle to
evade obligations or confuse legitimate issues,
the two corporations would be merge as one.
Azcor v NLRC
In cases where the employees are put in a
disadvantageous position as a result of the
employer’s separate juridical personalities,
pursuant to the fundamental doctrine that
corporate fiction should not be used as a
subterfuge to commit injustice and
circumvent labor laws, piercing applies. Lee v
Samahang Manggagawa ng Super Lamination
(6) The Case for Thinly-Capitalized
Corporations:
a. Alter Ego Piercing: corporation has no existing
assets of its own and the operation of the
corporation was so merged with those of the
shareholders as to be practically
indistinguishable; same office, funds held by
shareholders, and corporation has no visible
assets
b. Fraud Piercing: false pretense, fraudulent act
or fraudulent means perpetrated upon the
investing public; made to believe that the
corporation has financial capacity
c. Equity Piercing: corporation is under the
control of the shareholders who ran-up a
printing company who is in no position to pay
for the accounts ; personally benefited from
the operations of the company which they
never paid subscription in full; company has
no visible assets
(7) Evasion, Avoidance or Minimization of
Taxes
Alter ego piercing: use of dummies for the benefit of
the shareholder to avoid payment of war profit taxes;
allows tax authorities to levy upon corporate
properties to enforce the tax assessment against the
controlling shareholder Marvel v David
A taxpayer has the legal right to decrease the amount
of what otherwise would be his taxes or altogether
avoid them by means which the law permits, which
therefore would only constitute tax avoidance which
would allow piercing even in the absence of fraud
under the guise that the use of corporate separate
corporate veil was a means to defeat public
convenience.
However, when the maintenance of the separate
juridical entities serve only to minimize the collective
taxes that the corporation are paying, whereas in their
operations they are operated by overlapping and
informal manner, would justify the piercing based on
alter ego considerations for purposes of collecting the
proper taxes. Yutivo v CTA
To avoid payment by the incorporating spouses of the
estate taxes on the properties transferred to the
corporation. Piercing applies. Gala v Ellice
Where the corporation is merely an adjunct, business
conduit or alter ego of another corporation or when
they practice fraud on internal revenue laws, the
fiction of their separate and distinct corporate
identities shall be disregarded, and both entities
treated as one taxable person, subject to assessment
for the same taxable transaction. CIR c Menguito
 (8) Due Process Clause Considerations in basis has been adduced during trial to apply the
Piercing Cases piercing doctrine. Jacinto v CA

a. Suit against controlling shareholder is Arcilla v CA

not a suit against the corporation or Lawful application of the piercing doctrine where the
the subsidiary that would allow the President was held liable although it was not a party
piercing doctrine to be applied to the collection suit before the trial court.Violago v
against the latter BA Finance Corp

Failure to implead the corporation is a violation of due
process for it would be disregarding the distinct
separate personality without a hearing. PCGG v
Sandiganbayan
No summon means not acquiring jurisdiction over the
person. The general principle is that no person shall
be affected by any proceedings to which he is a
stranger, and strangers to a case are not bound by the
judgment rendered by the court. Padilla v CA
The elements of control laid down in Concept Builders
to allow the application of the piercing doctrine must
be properly pleaded and proved during the hearing on
the merits, and cannot be merely raised for the first
time in the motion for the issuance of an alias writ of
execution. Pacific House c CA

Before the doctrine of piercing the corporate veil can

be applied, based on the evidence presented, it is
imperative that the court must first have jurisdiction
over the corporation. Mayor v Tiu

BUT: Piercing of the corporate veil is premised on the

fact that the corporation concerned must have been
properly served with summons or properly subjected
to jurisdiction of the court a quo.

Exception: if it is shown by 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
fraud or like wrongdoings. International Academy of
Management and Economics v Litton

However: A suit brought against the corporate

officers sued in their official capacity would allow the
application of the piercing doctrine to make the
corporation liable since the corporation, although not
made a formal party to the case, as not denied due
process.

b. To make acting officers personally

liable under the piercing doctrine, is
there a need to bring new case
against the officer?

Application of the piercing doctrine may be made

even during the enforcement of the judgment debt of
the corporation against the controlling shareholders.
McConnel v CA

There is no denial of due process to hold officers liable

under the piercing doctrine, provided that evidential