Notes by Pamela Jane I. Torno Corporation Law and Basic Securities
Irvin Fabella
DOCTRINE OF SEPARATE JURIDICAL
PERSONALITY
Definition-
The doctrine of corporate juridical personality
states that a corporation is a juridical entity
with legal personality separate and distinct
from those acting for and, in its behalf, and,
in general, from the people comprising it.
(Francisco v. Mallen Jr., G.R. No. 173169, 22
Sept. 2010)
A private corporation organized under this
Code commences its corporate existence
and juridical personality from the date the
Commission issues the certificate of
incorporation under its official seal. (Sec. 18,
RCC)
A corporation sole, after filing the verified
articles of incorporation along with the
documents required in Sec. 110 with the
SEC, immediately becomes endowed with
corporate personality. This serves as an
exception to the rule that a corporation
acquires juridical personality only upon the
issuance of a certificate of incorporation by
the said government agency. (Ladia and
Reyes, The Revised Corporation Code of the
Philippines, Annotated, 2021, p. 114)
Juridical persons may acquire and possess
property of all kinds, as well as incur
obligations and bring civil or criminal actions,
in conformity with the laws and regulations of
their organization. (Art. 46, New Civil Code)
Case-
To be held criminally liable for the acts of a
corporation, there must be a showing that its
officers, directors, and shareholders actively
participated in or had the power to prevent
the wrongful act. A corporation’s personality
is separate and distinct from its officers,
directors, and shareholders. (SEC v. Price
Richardson Corp, G.R. No. 197032, 26 July
2017)
Atty.
By virtue of that doctrine, stockholders of a
corporation enjoy the principle of limited
liability: the corporate debt is not the debt of
the stockholder. Thus, being an officer or a
stockholder of a corporation does not make
one's property the property also of the
corporation. (Bustos vs. Millian Shoes Inc.,
G.R. 185024, April 4, 2017)
The president and manager of a corporation,
who entered into and signed a contract in his
official capacity, cannot be made liable
thereunder in his individual capacity in the
absence of stipulation to that effect due to the
personality of a corporation being separate
and distinct from the person composing it.
(Rustan Pulp & Paper Mills, Inc. vs.
Intermediate Appellate Court, G.R. No.
70789 October 19, 1992)
Significance of the Doctrine of Separate
Juridical Personality
1. Separate Liability for acts or contracts
– As a general rule, the obligation of the
corporation is not the liability of the
stockholders, directors, or officers, unless it
can be shown that such director/officer/agent
is guilty of gross negligence or bad faith or
committed an unlawful act and that the same
was clearly and convincingly proven. (Ibid.,
10)
A corporation may not, generally, be made to
answer for acts or liabilities of its
stockholders or those of the legal entities to
which it may be connected, and vice versa.
(Cease v. CA, G.R. No. L-33172, 18 Oct.
1979)
2. Right to bring actions – may bring civil
and criminal actions in its own name in the
same manner as natural persons. (Art. 46,
NCC)
NOTE: Rights belonging to the corporation
cannot be invoked by the stockholders (or
directors and officers) even if the latter own
substantial majority of the shares in that
corporation; and rights of the stockholders,
Notes by Pamela Jane I. Torno Corporation Law and Basic Securities
directors and officers cannot be invoked by
the corporation. (Stonehill v. Diokno, G.R.
No. L-19550, 19 June 1967)
3. Right to acquire and possess property
– property conveyed to or acquired by the
corporation is in law the property of the
corporation itself as a distinct legal entity and
not that of the stockholders or members.
Properties registered in the name of the
corporation are owned by it as an entity
separate and distinct from its corporators.
The corporators are not entitled to the
possession of any definite portion of its
property or assets. (Divina, Questions and
Answers on the Revised Corporation Code,
2020 edition, p. 8)
A corporation is a juridical person distinct
from the members composing it. Properties
in the name of the corporation are owned by
it as an entity separate and distinct from its
members. While shares of stocks constitute
personal property, they do not represent
property of the corporation. The corporation
has properties of its own. A share of stock
only represents an aliquot part of the
corporation’s property, or the right to share in
its proceeds but its holder is not the owner of
any. (Silverio v. Filipino Business
Consultants, Inc., G.R. No. 143312, 12 Aug.
2005)
At the very least, the interest of stockholders
is purely inchoate, or in sheer expectancy of
a right in the management of the corporation
and to share in the profits thereof and in the
properties and assets thereof on dissolution,
after payment of the corporate debts and
obligations. The interest of the stockholders
over the properties are merely inchoate.
(Saw v. CA, G.R. No. 90580, 08 Apr. 1991)
Moreover, under the trust fund doctrine,
the capital stock, property, and other assets
of a corporation are regarded as equity in
trust for the payment of corporate creditors
which are preferred over the stockholders in
Atty. Irvin Fabella
the distribution of corporate assets. The
distribution of corporate assets and property
cannot be made to depend on the whims and
caprices of the stockholders, officers, or
directors of the corporation unless the
indispensable conditions and procedures for
the protection of corporate creditors are
followed. (Yamamoto v. Nishino Leather
Industries, Inc., G.R. No. 150283, 16 Apr.
2008)
4. Acquisition of jurisdiction – When the
defendant is a corporation, partnership or
association organized under the laws of the
Philippines with a juridical personality,
service may be made on the president,
managing partner, general manager,
corporate secretary, treasurer, or in-house
counsel of the corporation wherever they
may be found, or in their absence or
unavailability, on their secretaries.
If such service cannot be made upon any of
the foregoing persons, it shall be made upon
the person who customarily receives the
correspondence for the defendant at its
principal office.
In case the domestic juridical entity is under
receivership or liquidation, service of
summons shall be made on the receiver or
liquidator, as the case may be.
Should there be a refusal on the part of the
persons above-mentioned to receive
summons despite at least three (3) attempts
on two (2) separate dates, service may be
made electronically, if allowed by the court,
as provided under Section 6 of Rule 14. (Sec.
12, Rule 14, Rules of Court)
5. Changes in individual membership –
corporation remains unchanged and
unaffected in its identity by changes in its
individual membership or ownership of its
stocks.
(from Arellano)
Notes by Pamela Jane I. Torno Corporation Law and Basic Securities
Liability for Torts – A corporation is civilly
liable in the same manner as natural persons
for torts, because generally speaking, the
rules governing the liability of a principal or
master for a tort committed by an agent or
servant are the same whether the principal
be a natural person or a corporation, and
whether the servant or agent be a natural or
artificial person. All of the authorities agree
that a principal or master is liable for every
tort which he expressly directs or authorizes,
and this is just true of a corporation as of a
natural person. A corporation is liable,
therefore, whenever a tortious act is
committed by the officer or agent under
express direction or authority from the
stockholder or members acting as a body, or
generally, from directors as governing body.
(PNB vs. Court of Appeals, G.R. No. L-
27155, May 1978)
Liability for Crimes – Corporations are
incapable of intent, hence, they cannot
commit felonies that are punishable under
the Revised Penal Code. They cannot
commit crimes that are punishable under
special laws because crimes are personal in
nature requiring a personal performance of
overt acts. In addition, the penalty of
imprisonment cannot be imposed. (Sec. 171,
RCC) A corporation may be charged and
prosecuted for a crime if the imposable
penalty is fine. Even if the statute prescribes
both fines and imprisonment as penalty, a
corporation may be prosecuted and, if found
guilty, may be fined. (Ching vs. Secretary of
Justice, G.R. No. 164317, February 6, 2006)
Moreover, if by express provision of law (e.g.,
Sections 9 and 14 of Anti-Dummy Act Law
and Anti-Money Laundering Act), the
corporation is held criminally liable.
Recovery of Moral Damages
GR: A corporation is not entitled to moral
damages because, being an artificial person
and having existence only in legal
contemplation, it has no feelings, no
Atty. Irvin Fabella
emotions, no senses. It cannot, therefore,
experience physical suffering and mental
anguish, which can be experienced only by
one having a nervous system. (ABS-CBN
Broadcasting Corp. v. CA, G.R. No. 128690,
21 Jan. 1999)
XPNs:
1. A corporation may recover moral damages
under item 7 of Art. 2219, of the NCC
because said provision expressly authorizes
the recovery of moral damages in cases of
libel, slander, or any other form of
defamation. NOTE: Art. 2219 (7) does not
qualify whether the injured party is a natural
or juridical person. Therefore, a corporation,
as a juridical person, can validly complain for
libel or any other form of defamation and
claim for moral damages. (Filipinas
Broadcasting Network, Inc. v. AMEC-BCCM,
G.R. No. 141994, 17 Jan. 2005)
2. When the corporation has a reputation that
is debased, resulting in its humiliation in the
business realm. But in such a case, it is
imperative for the claimant to present proof
to justify the award. It is essential to prove the
existence of the factual basis of the damage
and its causal relation to petitioner’s acts.
(MERALCO v. T.E.A.M. Electronics Corp.,
et. al., G.R. No. 131723, 13 Dec. 2007)
NOTE: While the court may allow the grant
of moral damages to corporations, it is not
automatically granted; there must still be
proof of the existence of the factual basis of
the damage and its causal relation to the
defendant’s acts. This is so because moral
damages, though incapable of pecuniary
estimation, are in the category of an award
designed to compensate the claimant for
actual injury suffered and not to impose a
penalty on the wrongdoer. (Crystal v. BPI,
G.R. No. 172428, 28 Nov. 2008)
Notes by Pamela Jane I. Torno Corporation Law and Basic Securities Atty. Irvin Fabella

Stockholders are NOT Real Parties in Doctrine of corporate negligence

Interest to Claim Damages and Recover
Compensation The hospital’s failure to supervise its resident
physicians and nurses and to take an active
The stockholders were clearly not vested
step in order to remedy their negligence
with any direct interest in the personal
renders it directly liable. The duty of providing
properties coming under the levy on
quality medical service is no longer the sole
attachment by virtue alone of their being
prerogative and responsibility of the
stockholders of the corporation. Their
physician. This is because the modern
stockholdings represented only their
hospital now tends to organize a highly-
proportionate or aliquot interest in the
professional medical staff whose
properties of the corporation but did not vest
competence and performance need also to
in them any legal right or title to any specific
be monitored by the hospital commensurate
properties of the corporation. Without doubt,
with its inherent responsibility to provide
the corporation remained the owner as a
quality medical care. Such responsibility
distinct legal person. Given the separate and
includes the proper supervision of the
distinct legal personality of the corporation,
members of its medical staff. Accordingly,
the stockholders lacked the legal personality
the hospital has the duty to make a
to claim the damages sustained from the levy
reasonable effort to monitor and oversee the
of the former’s properties. (Stronghold
treatment prescribed and administered by
Insurance Company, Inc. v. Cuenca, G.R.
the physicians practicing in its premises.
No. 173297, 06 Mar. 2013)
(Professional Services, Inc. vs Court of
Non-Applicability of Doctrine of Separate Appeals, G.R. No. 126297, February 2008)
Juridical Personality in Examination of
Officers to Ascertain Properties, Income
which can be Subjected to Execution
The doctrine of separate juridical personality
does not apply if the judgment creditor
wanted the officers to be examined not for
the purpose of passing unto them the liability
of the judgment obligor but to ascertain the
properties and income of the latter which can
be subjected for execution in order to satisfy
the final judgment and nothing else. (Linden
Suites, Inc. v. Meridien Far East Properties,
Inc., G.R. No. 211969, 04 Oct. 2021)
Entitlement of Corporations to
Constitutional Rights
Corporations are entitled to the following
rights under the Constitution:
1. Right to Due Process (Sec. 1, Art. III,
1987 Constitution);
2. Right against Unreasonable
Searches and Seizures. (Sec. 2,
ibid.)
Notes by Pamela Jane I. Torno Corporation Law and Basic Securities
DOCTRINE OF PIERCING THE
CORPORATE VEIL
The doctrine of piercing the corporate veil is
the doctrine that allows the State to
disregard, for certain justifiable reasons, the
notion that a corporation has a personality
separate and distinct from the persons
composing it.
Where it appears that business enterprises
are owned, conducted, and controlled by the
same parties, law and equity will disregard
the legal fiction that these corporations are
distinct entities and shall treat them as one.
This is in order to protect the rights of third
persons. (Vicmar Development Corporation
v. Elarcosa, et al., G.R. No. 202215, 09 Dec.
2015)
Absent any allegation or proof of fraud or
other public policy considerations, the
existence of interlocking directors, officers
and stockholders is not enough justification
to pierce the veil of corporate fiction as in the
instant case. (Hacienda Luisita Incorporated
v. Presidential Agrarian Reform Council,
G.R. No. 171101, 22 Nov. 2011)
This Court also held that “the doctrine of
piercing the veil of corporate entity can only
be raised during a full-blown trial over a
cause of action duly commenced involving
parties duly brought under the authority of
the court by way of service of summons or
what passes as such service. (Parayday v.
Shogun Shipping Co., Inc., G.R. No. 204555,
July 6, 2020, J. Hernando)
The corporation’s separate juridical
personality may be disregarded when there
is an abuse of the corporate form. Whenever
the doctrine applies, the principal and the
conduit will be treated as one; the controlled
corporation will be deemed to have, “so to
speak, no separate mind, will or existence of
its own, and is but a conduit for its principal.”
(WPM International Trading, Inc. and Warlito
Atty. Irvin Fabella
Manlapaz vs. Labayen, G.R. No. 182770,
September 17, 2014)
Piercing the corporate veil based on the alter
ego theory requires the concurrence of three
elements:
1. Control of the corporation by the
stockholder or parent corporation;
2. Fraud or fundamental unfairness
imposed on the plaintiff; and
3. Harm or damage caused to the
plaintiff by the fraudulent or unfair act
of the corporation.
The absence of any of these elements
prevents piercing the corporate veil. (PNB
vs. Hydro Resource Contractors, G.R. no.
167530, March 13, 2013)
Effect of Piercing the Corporate Veil
1. The corporation will be treated
merely as an association of persons,
undertaking a business and the
liability will attach directly to the
officers and stockholders.
2. Where there are two (2) corporations,
they will be merged into one, the one
being merely regarded as the
instrumentality, agency, conduit, or
adjunct of the other.
NOTE: Notwithstanding that the corporate
veil has been pierced, the corporation
continues for other legitimate objectives, the
corporate character is not necessarily
abrogated. (Reynoso IV v. CA, G.R. Nos.
116124-25, 22 Nov. 2000)
Notes by Pamela Jane I. Torno Corporation Law and Basic Securities
Grounds for Application of Doctrine of
Piercing the Corporate Veil
It applies upon the following circumstances:
(F-A-C-O)
1. If the fiction is used to perpetrate
fraud (Fraud Test);
2. If the complete control of one
corporate entity to another which
perpetuated the wrong is the
proximate cause of the injury
(Control Test);
3. If a certain corporation is only an
adjunct or an extension of the
personality of the corporation (Alter
Ego or Instrumentality Test); or
4. If the fiction is pierced to make the
stockholders liable for the obligation
of the corporation (Objective Test).
3-Pronged Test
The applicability of the alter ego or
instrumentality theory is determined through
the three-pronged test of control test, fraud
test, and harm test:
In this connection, case law lays down a
three-pronged test to determine the
application of the alter ego theory, which is
also known as the instrumentality theory,
namely:
(1) Control Test – 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;
This test requires that the subsidiary be
completely under the control and domination
of the parent. It examines the parent
corporation's relationship with the subsidiary.
It inquires whether a subsidiary corporation
Atty. Irvin Fabella
is so organized and controlled and its affairs
are so conducted as to make it a mere
instrumentality or agent of the parent
corporation such that its separate existence
as a distinct corporate entity will be ignored.
It seeks to establish whether the subsidiary
corporation has no autonomy and the parent
corporation, though acting through the
subsidiary in form and appearance, "is
operating the business directly for itself."
(ibid.)
(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
This test requires that the parent
corporation's conduct in using the subsidiary
corporation be unjust, fraudulent or wrongful.
It examines the relationship of the plaintiff to
the corporation. It recognizes that piercing is
appropriate only if the parent corporation
uses the subsidiary in a way that harms the
plaintiff creditor. As such, it requires a
showing of "an element of injustice or
fundamental unfairness." (ibid.)
(3) Harm Test – The aforesaid control and
breach of duty must have proximately
caused the injury or unjust loss complained
of. (Roquel v. Philippine National Bank, G.R.
No. 246270, June 30, 2021)
This test requires the plaintiff to show that the
defendant's control, exerted in a fraudulent,
illegal or otherwise unfair manner toward it,
caused the harm suffered. A causal
connection between the fraudulent conduct
committed through the instrumentality of the
subsidiary and the injury suffered or the
damage incurred by the plaintiff should be
established. The plaintiff must prove that,
unless the corporate veil is pierced, it will
have been treated unjustly by the
defendant's exercise of control and improper
use of the corporate form and, thereby, suffer
damages. (ibid.)
Notes by Pamela Jane I. Torno Corporation Law and Basic Securities
Areas of Application
The doctrine of piercing the corporate veil
applies only in three basic instances,
namely:
(a) when the separate distinct corporate
personality defeats public convenience, as
when the corporate fiction is used as a
vehicle for the evasion of an existing
obligation;
(b) in fraud cases, or when the corporate
entity is used to justify a wrong, protect a
fraud, or defend a crime; or
(c) is used in alter ego cases, i.e., where a
corporation is essentially a farce, since it is a
mere alter ego or business conduit of a
person, or where the corporation is so
organized and controlled and its affairs
conducted as to make it merely an
instrumentality, agency, conduit or adjunct of
another corporation.
Two-fold Implication:
1. The court must first acquire
jurisdiction over the corporation or
corporations involved before its or
their separate personalities are
disregarded; and
2. The doctrine of piercing the veil of
corporate entity can only be raised
during a full-blown trial over a cause
of action duly commenced involving
parties duly brought under the
authority of the court by way of
service of summons or what passes
as such service. (Kukan International
Corp v. Reyes, G.R. No. 182729, 29
Sept. 2010)
NOTE: The Supreme Court, however, ruled
differently in Gold Line Tours v. Lacsa (G.R.
No. 159108, 18 June 2012). It held that if the
RTC had sufficient factual basis to conclude
that the two corporations are one and the
same entity as when they have the same
president and controlling shareholder and it
Atty. Irvin Fabella
is generally known in the place where they
do business that they are one, the third-party
claim filed by the other corporation was
properly set aside and the levy on its property
held valid even though the latter was not
made a party to the case. The judgment may
be enforced against the other corporation to
prevent multiplicity of suits and save the
parties unnecessary expenses and delays.
(Divina, 2021)
Tax Avoidance Does Not Justify Piercing
Corporate Veil
There is one case where it was held that the
corporation is a business conduit of the
stockholders when the latter transferred their
properties to a corporation in exchange for its
shares of stock. The Supreme Court said that
what the transferors did was to invest their
properties and change the nature of their
ownership from unincorporated to
incorporated form by organizing a
corporation to take control of their properties
and at the same time save on estate tax.
There was no sale of property that would
violate the right of first refusal of the lessee
over the said properties. Even through the
corporation is a conduit of the shareholders,
its corporate veil was not pierced. Tax
avoidance, being valid and legitimate, does
not justify piercing the veil of corporate
fiction. (Divina, 2020, citing Delphers Traders
Corp. v. Intermediate Appellate Court, G.R.
No. 69259, 26 Jan. 1988)
Alter-Ego Doctrine
The doctrine of alter ego is based upon the
misuse of a corporation by an individual for
wrongful or inequitable purposes, and in
such case the court merely disregards the
corporate entity and holds the individual
responsible for acts knowingly and
intentionally done in the name of the
corporation. (Sulo ng Bayan vs. Araneta,
G.R. no. L-31061, Aug. 17, 1976)
Notes by Pamela Jane I. Torno Corporation Law and Basic Securities
Kinds of Piercing:
(1) Traditional veil-piercing – a court
disregards the existence of the corporate
entity so a claimant can reach the assets of
a corporate insider (Intl. Academy of
Management and Economics vs. Litton and
Company, G.R. No. 191525, Dec. 13, 2017)
(2) Reverse piercing action – flows in the
opposite direction (of traditional corporate
veil-piercing) and makes the corporation
liable for the debt of the shareholders. (ibid.)
Two Types of Reverse Pierce
(1) Outside Reverse Piercing — occurs
when a party with a claim against an
individual or corporation attempts to be
repaid with assets of a corporation owned or
substantially controlled by the defendant.
(2) Inside Reverse Piercing — in 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 personal assets. (Intl.
Academy of Management and Economics
vs. Litton and Company, G.R. No. 191525,
Dec. 13, 2017)
Effects of piercing the corporate veil:
(a) If only one corporation is involved, to
regard its existence as an association of
persons; and
(b) If two corporations participate, to merge
them, and consider them only as one entity.
(Remo vs. IAC, G.R. No. L-67626, April
1989);
(c) The corporation continues for other
legitimate objectives, the corporate character
not necessarily abrogated. (Reynoso IV vs.
CA, G.R. Nos. 116124-25, November 22,
2010)
Atty. Irvin Fabella
Piercing the Veil of Corporate Fiction On
The Basis Of Equity
Equity cases applying the piercing doctrine
are what are termed the "dumping ground,"
where no fraud or alter ego circumstances
can be culled by the Court to warrant
piercing.
Specifically, the equity test can be applied
when:
1. The corporate personality would be
inconsistent with the business
purpose of the legal fiction;
2. The piercing the corporate fiction is
necessary to achieve justice or equity
for those who deal in good faith with
the corporation; or
3. The use of the separate juridical
personality is used to confuse
legitimate issues.
Indications that a Subsidiary Corporation
is a Mere Instrumentality of its Parent
Corporation
1. The parent corporation owns all or
most of the capital stock of the
subsidiary;
2. The parent and subsidiary
corporations have common directors
or officers;
3. The parent corporation finances the
subsidiary;
4. The parent corporation subscribes to
all the capital stock of the subsidiary
or otherwise causes its incorporation;
5. The subsidiary has grossly
inadequate capital;
6. The parent corporation pays the
salaries and other expenses or
losses of the subsidiary;
7. The subsidiary has substantially no
business except with the parent
corporation or no assets except those
conveyed to or by the parent
corporation;
8. In the papers of the parent
corporation or in the statements of its
officers, the subsidiary is described
as a department or division of the
Notes by Pamela Jane I. Torno Corporation Law and Basic Securities Atty. Irvin Fabella

parent corporation, or its business or Two (2) Types of Reverse Piercing

financial responsibility is referred to
as the parent corporation’s own;
9. The parent corporation uses the
property of the subsidiary as its own;
10. The directors or executives of the
subsidiary do not act independently
in the interest of the subsidiary but
take their orders from the parent
corporation;
11. The formal legal requirements of the
subsidiary are not observed. (PNB v.
Ritratto Group, G.R. No. 142616, 13
July 2001)
Piercing the Corporate Veil May Apply to
Natural Persons
1. Outsider reverse piercing occurs when
a party with a claim against an individual or
corporation attempts to be repaid with assets
of a corporation owned or substantially
controlled by the defendant.
2. 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 personal
assets. (IAM/E v. Litton and Company Inc.,
supra)

When the Corporation is the Alter Ego of

a Natural Person – the piercing of the
corporate veil may apply to corporations as
well as natural persons involved with
corporations. The "corporate mask may be
lifted and the corporate veil may be pierced
when a corporation is just but the alter ego of
a person or of another corporation."

Reverse Piercing of the Corporate Veil –

from American parlance of what is called
reverse piercing or reverse corporate
piercing or piercing the corporate veil "in
reverse." As held in the U.S. Case, C.F.
Trust, Inc., v. First Flight Limited Partnership,
"in a traditional veil-piercing action, a court
disregards the existence of the corporate
entity so a claimant can reach the assets of
a corporate insider. In a reverse piercing
action, however, the plaintiff seeks to reach
the assets of a corporation to satisfy claims
against a corporate insider. Reverse-piercing
flows in the opposite direction (of traditional
corporate veil-piercing) and makes the
corporation liable for the debt of the
shareholders." (IAM/E v. Litton and
Company Inc., G.R. No. 191525, 13 Dec.
2017)