March 13, 2013

PHILIPPINE NATIONAL BANK

Vs
HYDRO RESOURCES CONTRACTORS CORPORATION

FACTS:
The petitioners DBP and PNB foreclosed on some of the mortgages held against the assets of Marinduque
Mining and Industrial Corporation (MMIC) sometime in 1984. Following the foreclosure, DBP and PNB
acquired almost all of MMIC's assets and, by setting up NMIC, resumed MMIC's business operations.
Except for five qualifying shares, DBP and PNB held 57% and 43%, respectively, of the outstanding
shares of NMIC. As of September 1984, the NMIC Board of Directors consisted of Jose Tengco, Jr.,
Rolando Zosa, Ruben Ancheta, Geraldo Agulto, and Faustino Agbada, all of whom were employed by
DBP or PNB.
Following that, in 1985, NMIC contracted Hercon, Inc. for NMIC's Mine Stripping and Road
Construction Program for a total contract price of ₱35,770,120. After calculating the payments already
made by NMIC under the program and crediting NMIC's receivables from Hercon, Inc., the latter
discovered that NMIC still owed Hercon, Inc. an unpaid amount of ₱8,370,934.74.10.
A complaint for money was filed in the RTC of Makati, Branch 136, seeking to hold petitioners NMIC,
DBP, and PNB jointly and severally liable for the sum owed to Hercon, Inc. The case was docketed as
Civil Case No. 15375. Hercon, Inc. had made multiple demands on NMIC, including a letter of final
demand dated August 12, 1986.
Hercon, Inc. was acquired by HRCC in a merger following the filing of the complaint. As a result, the
complaint was amended to substitute HRCC for Hercon, Inc.
On December 8, 1986, then-President Corazon C. Aquino signed Proclamation No. 50, forming the APT
for the expedient disposition and privatization of certain government enterprises and/or their assets. In
accordance with the aforementioned Proclamation, on February 27, 1987, DBP and PNB issued their
respective deeds of transfer in behalf of the National Government, assigning, transferring, and conveying
certain assets and liabilities, including their respective interests in NMIC.
According to a Trust Agreement, the National Government in turn transferred the aforementioned assets
and liabilities to the APT as trustee on the same day. As a result, the complaint was again amended to add
and name the APT as a defendant.
DBP’s answer asserted the defense that HRCC had no cause of action against it because DBP was not
privy to HRCC’s contract with NMIC. PNB's answer similarly stated a lack of grounds for action. In its
response, APT asserted the following defenses: lacking grounds for action against it; lack of privity
between Hercon, Inc. and APT; and National Government's preferred lien over NMIC's assets.
Upon the trial, the RTC of Makati issued a decision in favor of HRCC on November 6, 1995. It
pierced NMIC's corporate veil and found DBP and PNB jointly and severally liable together with NMIC.

ISSUES:
1. Whether or not there is enough evidence to pierce the veil of NMIC’s corporate fiction.
2. Whether or not PNB, DBP and APT solidarily liable with NMIC.

RULING:

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With regards to the first issue, the Supreme Court finds that there is NO sufficient proof to pierce the veil
of corporate fiction. The Supreme Court lays down a “three-pronged test to determine the application of
the alter ego theory” because both the RTC and Court of Appeals relied on the alter ego theory when
they disregarded the separate corporate personality of NMIC.
The three-pronged test also known as instrumentality test are (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 right; and; (3) The aforesaid control and breach of duty
must have proximately caused the injury or unjust loss complained of.
Supreme Court stated that, piercing the corporate veil based on the alter ego theory requires the
concurrence of three elements, and the absence of any of these elements prevents the piercing the
corporate veil. And the court finds that none of the tests has been satisfactorily met this case. The mere
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, and
nothing in the records shows that the corporate finances, policies and practices of NMIC were dominated
by DBP and PNB in such a way that NMIC could be considered to have no separate mind, will or
existence of its own but a mere conduit for DBP and PNB. Because there is no evidence pointing to a
fraudulent, unlawful, or unfair act perpetrated against HRCC by DBP and PNB under the cover of NMIC,
there is no foundation to conclude that NMIC was merely DBP and PNB's alter ego.
The Supreme Court also provided the general rule that a corporation will be looked upon as a legal entity,
unless and until sufficient reason to the contrary appears. When the notion of legal entity is used to defeat
public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as
an association of persons. Also, the corporate entity may be disregarded in the interest of justice in such
cases as fraud that may work inequities among members of the corporation internally, involving no rights
of the public or third persons. In both instances, there must have been fraud, and proof of it. For the
separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and
convincingly established. It cannot be presumed.
In regards to the third component, there was no harm that could be said to have been directly caused by
DBP and PNB on HRCC for which HRCC could hold DBP and PNB solidarily liable with NMIC in the
absence of both control by DBP and PNB of NMIC and fraud or fundamental unfairness perpetrated by
DBP and PNB through the corporate cover of NMIC.
Since DBP, PNB, and NMIC cannot be held jointly and severally liable, the APT cannot be held
responsible either. Only NMIC, a unique and independent legal body, is responsible for paying HRCC the
sum of 8,370,934.74 in addition to the accrued legal interest.

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