Doctrine of Piercing the Veil of Corporate Entity

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Hi, I am Attorney Marie-Chris Bacan-Lasco. This is my virtual classroom. Welcome to my
YouTube channel.

In this channel, I shall aim to simplify the law. I shall discuss concepts and principles of law in
under 10 minutes. Hello once again, welcome to our virtual classroom.

For this video, I would like to talk about the doctrine of piercing the veil of corporate entity.
In another video where I talked about corporations, I was also able to talk about the
doctrine of corporate entity, where we said that a corporation being an entity merely
created by operation of law, it being an artificial being, it is considered an entity that is
separate and distinct from the stockholders composing it or from the members composing
it. That is the doctrine of corporate entity.

Again, the corporation has a separate juridical personality that is again distinct from the
members or the stockholders composing it. Now, what then is the doctrine of piercing the
veil of corporate entity? By the term piercing the veil, that will already tell you that we are
to disregard the doctrine of corporate entity. We are to disregard treating the corporation
as a separate entity.

As I have mentioned in the previous video, when you say doctrine of corporate entity, yes,
the corporation is to be treated separately such that the liabilities of the corporation will
remain to be the liabilities of the corporation. It does not become the liabilities of the
officers or the directors. That's the doctrine of corporate entity.

But what is now this doctrine of piercing the veil? As mentioned, we disregard this separate
and distinct personality of the corporation. The question now is, when do we disregard the
separate and juridical personality of the corporation? When then do we consider the
corporation and the directors and the officers as one? When do we pierce the veil? It is
when the corporate entity or the corporation is used as a shield for fraud. The corporation
now is used as a vehicle to perpetrate fraud or illegal activity The doctrine of piercing the
veil will tell you that the court can actually disregard the corporate entity to remove the
barrier between the corporate entity and the directors or the officers so that the directors
and the officers can now be made liable civilly or criminally due to their illegal acts or due to
the fraud that they have committed.

Let me give you an example to better understand the doctrine of piercing the veil. Again,
when we discuss the doctrine of piercing the veil of corporate entity, we have to discuss side
by side the doctrine of corporate entity. So now, the example.

ABC Corporation borrowed money from Mr. X. Again, in the doctrine of corporate entity, we
said that the corporation is separate and distinct from the stockholders of the corporation
or from the incorporators of the corporation. So in that example, ABC Corporation
borrowing money from Mr. X. If Mr. X now would want to demand payment for the loan
that was obtained by ABC Corporation, then Mr. X will have to go after ABC Corporation. It
shall be ABC Corporation that will be liable.

In other words, it shall be the assets of ABC Corporation that will be used to pay off the debt
to Mr. X. Because again, the doctrine of corporate entity will tell you that ABC Corporation is
separate and distinct from the incorporators, from the stockholders, from the board of
directors of such corporation. In other words, Mr. X cannot go after the board of directors or
the stockholders or the incorporators for the payment of such loan. The board of directors is
not obligated to get money from their own pockets to pay for the debt of ABC Corporation.

That is the doctrine of corporate entity. Now, when can the doctrine of corporate entity be
pierced? So, for example, that ABC Corporation, the board of directors decided that they
don't want to pay Mr. X for one reason or another. The corporation actually had sufficient
assets, but they wanted to get away with paying.

What does or rather what the board of directors did was to dissolve the corporation. Okay,
they dissolve it and then they create another corporation, thinking that by dissolving it, Mr.
X cannot go after them because of the doctrine of corporate entity. Now, remember that
the reason that they dissolve the corporation was for purpose, for the purpose of
defrauding Mr. X so that the corporation will not be able to pay the debt of the corporation
to X. They dissolved it as if they are unable to pay, and then they transferred all the assets of
ABC Corporation to a new corporation, XYZ Corporation, still owned by the same set of
owners or stockholders.

Clearly, ABC Corporation now cannot be considered as separate and distinct from the board
of directors, from the incorporators, or from the stockholders. Why? Because the doctrine
of corporate entity was used as a vehicle for fraud. And so, Mr. X can now ask the court to
pierce the veil.

Meaning, Mr. X can now go after the board of directors, can now go after the officers who
are guilty of committing this scheme, this fraudulent scheme. So, while in the doctrine of
corporate entity, the general rule is the corporation is separate and distinct, such that you
cannot go after the officers or the board of directors for the death of the corporation. In
piercing the veil, such is allowed of going after the guilty member of the board of directors
or the guilty stockholder for perpetrating the fraud, for using the corporation as a vehicle to
commit fraud, just like in our example.

So, by piercing the veil, your creditor in our example, Mr. X, can now go after the officers,
the members of the board of directors who were guilty of committing this fraudulent
scheme. That is the concept. That is the principle behind the doctrine of piercing the veil of
corporate entity.

Another example where the corporation is used as a vehicle to commit fraud. Supposing Mr.
A has several creditors. He is insolvent, not necessarily that he has no properties, only that
his properties are not enough to pay all his creditors.

He does not want to pay any of them. So, what he does is, he creates a corporation and
transfers whatever property that he has left to the corporation, so that when the creditors
will now attach, will now try to collect from him and will now try to attach properties, they
could no longer attach any properties because he has not, as he has already transferred his
properties to the corporation that he has created. For the purpose of such fraudulent
scheme, for the purpose of defrauding his creditors.

Now, can the creditors go after the corporation for the debts of Mr. A? The answer now is
yes, because you can apply the doctrine of piercing the veil. Again, the doctrine of corporate
entity would have told you that the creation of Mr. A's corporation is supposedly a
personality that is separate and distinct from Mr. A. However, since he created this
corporation as a means to commit fraud, then you can apply the doctrine of piercing the
veil. Now, of course, the creditors will have the burden of proof if they want the courts to
pierce the veil of corporate entity.

Why? Because of the principle that he who alleges must prove. So, there are several other
cases that the Supreme Court applied the doctrine of piercing the veil of corporate entity. I
will put some of the cases here so that you can check them out.

So, that is it for this video. I hope you now understand what is meant by the doctrine of
piercing the veil of corporate entity. See you next time.

I hope you have learned something from this video. If you have, please click like, subscribe,
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watching.

See you next time in MBL Classroom.

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