What is the doctrine of piercing the corporate veil
A Corporation is defined as an artificial being created by the operation of law, having the right of succession and the powers and properties expressly authorized by law or incident to its existence. [1] It means that the corporation code treats a corporation as though it were a person by process of fiction, or by regarding it as an artificial person distinct and separate from its individual stockholders. It owes its existence to law, and it is an artificial person created by law for certain specific purposes, whose existence, powers, and liberties are fixed by its charter. [2] In other words, a corporation is a distinct and separate entity from its stockholders—the Doctrine of Corporate Entity.
The doctrine of piercing the corporate veil is the exception to the doctrine of corporate entity. Under this doctrine, the court looks at the corporation as a mere collection of individuals or an aggregation of persons undertaking business as a group, disregarding the separate personality of the corporation unifying the group. [3] It provides that when the corporate entity or its so-called “veil” is used as a shield to perpetuate fraud, to defeat public convenience, justify wrong, or defend crime, this fiction shall be disregarded and the individuals composing it will be treated identically. (Villanueva-Castro)
What are the cases where the piercing of a corporate veil is used?
The Supreme Court provided instances where piercing the corporate veil should be used. First, it shall be applied in fraud cases. An example of this is when the corporate identity is used to justify a wrong, protect fraud, or defeat public convenience. There should be an intent to commit a wrong, and the corporation is used to attain such a purpose. Second, it is applied when the corporation is used as a mere alter ego. These are cases when the corporate entity is merely a farce because the corporation acts as a mere alter ego, business conduit, or instrumentality of a person or another corporation; or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit, or adjunct of another corporation. It is also worthy to note that fraud is not an element in these cases. Third, it is also applied in equity cases, wherein the piercing of the corporate fiction is necessary to achieve justice or equity. [4]
In Philippine National Bank v. Hydro Resources Contractors, the Supreme Court provided for a three-pronged test to determine the application of the Alter Ego Theory (Instrumentality Theory) namely: the control test, fraud test and harm test.
The control test means complete domination, not mere majority or complete stock control. It involves control over its finances, policies, and business practices related to the contested transaction, such that the corporate entity has no separate mind, will, or existence of its own regarding the transaction. In this context, the fraud test is incorporated. The control must have been used to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or to dishonest and unjust act in contravention of the plaintiff’s legal right. Finally, after completing the control test and fraud test, the harm test requires that the transaction be the proximate cause of the injury or unjust loss complained of.
To successfully invoke the doctrine of piercing the corporate veil, all three elements must be present, otherwise, their absence will prevent the courts from piercing the corporate veil.
Other cases of piercing
- When the veil of corporate fiction is made as a shield to perpetuate a fraud or confuse legitimate issues such as the relation of employer and employee. [5]
- When used as a shield for tax evasion. [6]
- When used to shield violation of the prohibition against forum shopping. [7]
- When the separate identity of the corporation is being utilized to violate intellectual property rights of a third person. [8]
May it apply to non-stock corporations?
In the case of International Academy of Management and Economics (IAME) v. Litton & Co, [9] the petitioner IAME argued that the doctrine of piercing the corporate veil only applies to stock corporations. IAME argued that since it is a non-stock corporation, there are no stockholders to hold liable in such a situation but instead only members. Hence, they do not have investments or shares of stock or assets to answer for possible liabilities.
The Supreme Court applied the principle of ubi lex non distinguit, nec nos distinguere, that since the law does not make a distinction between a stock and non-stock corporation, neither should there be a distinction in the doctrine of piercing the veil of a corporation. While IAME is an educational institution, it is still a registered corporation conducting its affairs as such. In determining the proprietary applicability of piercing the veil of corporate fiction, the Supreme Court has not, in a number of cases, addressed the issue of whether a corporation is a stock or non-stock corporation. Moreover, control of ownership does not hinge on stock ownership.
Consequences of corporate veil piercing and who is liable when the veil of corporate fiction is pierced?
When the corporate veil is pierced, the effect is that the corporation and persons who controls or owns the corporation, or those who are responsible for the complained acts, are treated as one person, such that when the corporation is found by the courts to be liable, these persons too become liable.
Footnotes:
[1] REVISEDCORPORATION CODE, Rep. Act. No. 11232, Section 2.
[2] Tayag v. Benguet Consolidated Inc., G.R. No. L-23145, 29 November 1968
[3] Kukan International Corporation v. RM Morales Trophies and Plaques, G.R. No. 182729 , 29 September 2010
[4] California Manufacturing Company, Inc v. Advanced Technology System, G.R. No. 202454, 25 April 2017
[5] Claparols, et al., v. Court of Industrial Relations, et al., G.R. No. L-30822, 31 July 1975
[6] Commissioner of Internal Revenue, G.R. No. L-17618, 31 August 31, 1964.
[7] First Philippine International Bank et al., v. Court of Appeals et al., G.R. No. 115849, 24 January 1996.
[8] Uy et al., v. National Labor Relations Commission, G.R. No. 157851, 29 June 2007.
[9] International Academy of Management and Economics (IAME) v. Litton & Co., G.R. No. 191525, 13 December 2017.