Philippine National Bank vs. Hydro Resources
Contractors Corp.
G.R. Nos. 167530/61; 167603; March 13, 2013.
First Division [LEONARDO-DE CASTRO, J.]
Facts:
Sometime
in 1984, petitioners DBP and PNB foreclosed on certain mortgages made on the
properties of Marinduque Mining and Industrial Corporation (MMIC). As a result
of the foreclosure, DBP and PNB acquired substantially all the assets of MMIC
and resumed the business operations of the defunct MMIC by organizing NMIC. DBP
and PNB owned 57% and 43% of the shares of NMIC, respectively, except for five
qualifying shares. As of September 1984, the members of the Board of Directors
of NMIC, namely, Jose Tengco, Jr., Rolando Zosa, Ruben Ancheta, Geraldo Agulto,
and Faustino Agbada, were either from DBP or PNB.
Subsequently, NMIC
engaged the services of Hercon, Inc., for NMIC’s Mine Stripping and Road
Construction Program in 1985 for a total contract price of ₱35,770,120. After
computing the payments already made by NMIC under the program and crediting the
NMIC’s receivables from Hercon, Inc., the latter found that NMIC still has an
unpaid balance of ₱8,370,934.74. Hercon, Inc. made several demands on NMIC,
including a letter of final demand dated August 12, 1986, and when these were
not heeded, a complaint for sum of money was filed in the RTC of Makati, Branch
136 seeking to hold petitioners NMIC, DBP, and PNB solidarily liable for the
amount owing Hercon, Inc.
Subsequent to the
filing of the complaint, Hercon, Inc. was acquired by HRCC in a merger. This
prompted the amendment of the complaint to substitute HRCC for Hercon, Inc.
Thereafter, on
December 8, 1986, then President Corazon C. Aquino issued Proclamation No. 50
creating the APT for the expeditious disposition and privatization of certain
government corporations and/or the assets thereof. Pursuant to the said
Proclamation, on February 27, 1987, DBP and PNB executed their respective deeds
of transfer in favor of the National Government assigning, transferring and
conveying certain assets and liabilities, including their respective stakes in
NMIC. In turn and on even date, the National Government transferred the said
assets and liabilities to the APT as trustee under a Trust Agreement. Thus, the
complaint was amended for the second time to implead and include the APT as a
defendant.
In its answer,
NMIC claimed that HRCC had no cause of action. It also asserted that its
contract with HRCC was entered into by its then President without any
authority. Moreover, the said contract allegedly failed to comply with laws,
rules and regulations concerning government contracts. NMIC further claimed
that the contract amount was manifestly excessive and grossly disadvantageous
to the government. NMIC made counterclaims for the amounts already paid to
Hercon, Inc. and attorney’s fees, as well as payment for equipment rental for
four trucks, replacement of parts and other services, and damage to some of
NMIC’s properties.
For its part,
DBP’s answer raised the defense that HRCC had no cause of action against it
because DBP was not privy to HRCC’s contract with NMIC. Moreover, NMIC’s
juridical personality is separate from that of DBP. PNB’s answer also invoked
lack of cause of action against it. It also raised estoppel on HRCC’s part and
laches as defenses, claiming that the inclusion of PNB in the complaint was the
first time a demand for payment was made on it by HRCC. PNB also invoked the
separate juridical personality of NMIC and made counterclaims for moral damages
and attorney’s fees.
RTC
pierced the corporate veil of NMIC and held DBP and PNB solidarily liable with
NMIC. The business of NMIC was then also being conducted and controlled by both
DBP and PNB. In fact, it was Rolando M. Zosa, then Governor of DBP, who was
signing and entering into contracts with third persons, on behalf of NMIC.
CA
affirmed the piercing of the veil of the corporate personality of NMIC and held
DBP, PNB, and APT solidarily liable with NMIC. It is indubitable that [NMIC]
was owned by appellants DBP and PNB to the extent of 57% and 43% respectively;
that said two (2) appellants are the only stockholders, with the qualifying
stockholders of five (5) consisting of its own officers and included in its
charter merely to comply with the requirement of the law as to number of
incorporators; and that the directorates of DBP, PNB and [NMIC] are
interlocked.
Issue:
Whether
or not there is sufficient ground to pierce the veil of corporate fiction.
Held:
No; a
corporation is an artificial entity created by operation of law. It possesses
the right of succession and such powers, attributes, and properties expressly
authorized by law or incident to its existence. It has a personality separate
and distinct from that of its stockholders and from that of other corporations
to which it may be connected. As a consequence of its status as a distinct
legal entity and as a result of a conscious policy decision to promote capital
formation, a corporation incurs its own liabilities and is legally responsible
for payment of its obligations. In other words, by virtue of the separate
juridical personality of a corporation, the corporate debt or credit is not the
debt or credit of the stockholder. This protection from liability for
shareholders is the principle of limited liability.
Equally
well-settled is the principle that the corporate mask may be removed or the
corporate veil pierced when the corporation is just an alter ego of a person or
of another corporation. For reasons of public policy and in the interest of
justice, the corporate veil will justifiably be impaled only when it becomes a
shield for fraud, illegality or inequity committed against third persons.
The
doctrine of piercing the corporate veil applies only in three (3) basic areas,
namely: 1) defeat of public convenience as when the corporate fiction is used
as a vehicle for the evasion of an existing obligation; 2) fraud cases or when
the corporate entity is used to justify a wrong, protect fraud, or defend a
crime; or 3) alter ego cases, where a corporation is merely 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 are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another corporation.
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, 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.
The
first prong is the "instrumentality"
or "control" test. 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 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."
The
second prong is the "fraud"
test. 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."
The
third prong is the "harm"
test. 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.
To summarize, piercing the corporate
veil based on the alter ego theory requires the concurrence of three elements:
control of the corporation by the stockholder or parent corporation, fraud or
fundamental unfairness imposed on the plaintiff, and 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.
Philippine
National Bank vs. Hydro Resources Contractors Corp.
G.R. Nos. 167530/61; 167603; March 13, 2013.
First Division [LEONARDO-DE CASTRO, J.]
Facts:
Sometime
in 1984, petitioners DBP and PNB foreclosed on certain mortgages made on the
properties of Marinduque Mining and Industrial Corporation (MMIC). As a result
of the foreclosure, DBP and PNB acquired substantially all the assets of MMIC
and resumed the business operations of the defunct MMIC by organizing NMIC. DBP
and PNB owned 57% and 43% of the shares of NMIC, respectively, except for five
qualifying shares. As of September 1984, the members of the Board of Directors
of NMIC, namely, Jose Tengco, Jr., Rolando Zosa, Ruben Ancheta, Geraldo Agulto,
and Faustino Agbada, were either from DBP or PNB.
Subsequently,
NMIC engaged the services of Hercon, Inc., for NMIC’s Mine Stripping and Road
Construction Program in 1985 for a total contract price of ₱35,770,120. After
computing the payments already made by NMIC under the program and crediting the
NMIC’s receivables from Hercon, Inc., the latter found that NMIC still has an
unpaid balance of ₱8,370,934.74. Hercon, Inc. made several demands on NMIC,
including a letter of final demand dated August 12, 1986, and when these were
not heeded, a complaint for sum of money was filed in the RTC of Makati, Branch
136 seeking to hold petitioners NMIC, DBP, and PNB solidarily liable for the
amount owing Hercon, Inc.
Subsequent
to the filing of the complaint, Hercon, Inc. was acquired by HRCC in a merger.
This prompted the amendment of the complaint to substitute HRCC for Hercon,
Inc.
Thereafter,
on December 8, 1986, then President Corazon C. Aquino issued Proclamation No.
50 creating the APT for the expeditious disposition and privatization of
certain government corporations and/or the assets thereof. Pursuant to the said
Proclamation, on February 27, 1987, DBP and PNB executed their respective deeds
of transfer in favor of the National Government assigning, transferring and
conveying certain assets and liabilities, including their respective stakes in
NMIC. In turn and on even date, the National Government transferred the said
assets and liabilities to the APT as trustee under a Trust Agreement. Thus, the
complaint was amended for the second time to implead and include the APT as a
defendant.
In
its answer, NMIC claimed that HRCC had no cause of action. It also asserted
that its contract with HRCC was entered into by its then President without any
authority. Moreover, the said contract allegedly failed to comply with laws,
rules and regulations concerning government contracts. NMIC further claimed
that the contract amount was manifestly excessive and grossly disadvantageous
to the government. NMIC made counterclaims for the amounts already paid to
Hercon, Inc. and attorney’s fees, as well as payment for equipment rental for
four trucks, replacement of parts and other services, and damage to some of
NMIC’s properties.
For
its part, DBP’s answer raised the defense that HRCC had no cause of action
against it because DBP was not privy to HRCC’s contract with NMIC. Moreover,
NMIC’s juridical personality is separate from that of DBP. PNB’s answer also
invoked lack of cause of action against it. It also raised estoppel on HRCC’s
part and laches as defenses, claiming that the inclusion of PNB in the
complaint was the first time a demand for payment was made on it by HRCC. PNB
also invoked the separate juridical personality of NMIC and made counterclaims
for moral damages and attorney’s fees.
RTC
pierced the corporate veil of NMIC and held DBP and PNB solidarily liable with
NMIC. The business of NMIC was then also being conducted and controlled by both
DBP and PNB. In fact, it was Rolando M. Zosa, then Governor of DBP, who was
signing and entering into contracts with third persons, on behalf of NMIC.
CA
affirmed the piercing of the veil of the corporate personality of NMIC and held
DBP, PNB, and APT solidarily liable with NMIC. It is indubitable that [NMIC]
was owned by appellants DBP and PNB to the extent of 57% and 43% respectively;
that said two (2) appellants are the only stockholders, with the qualifying
stockholders of five (5) consisting of its own officers and included in its
charter merely to comply with the requirement of the law as to number of
incorporators; and that the directorates of DBP, PNB and [NMIC] are
interlocked.
Issue:
Whether
or not there is sufficient ground to pierce the veil of corporate fiction.
Held:
No; a
corporation is an artificial entity created by operation of law. It possesses
the right of succession and such powers, attributes, and properties expressly
authorized by law or incident to its existence. It has a personality separate
and distinct from that of its stockholders and from that of other corporations
to which it may be connected. As a consequence of its status as a distinct
legal entity and as a result of a conscious policy decision to promote capital
formation, a corporation incurs its own liabilities and is legally responsible
for payment of its obligations. In other words, by virtue of the separate
juridical personality of a corporation, the corporate debt or credit is not the
debt or credit of the stockholder. This protection from liability for
shareholders is the principle of limited liability.
Equally
well-settled is the principle that the corporate mask may be removed or the
corporate veil pierced when the corporation is just an alter ego of a person or
of another corporation. For reasons of public policy and in the interest of
justice, the corporate veil will justifiably be impaled only when it becomes a
shield for fraud, illegality or inequity committed against third persons.
The
doctrine of piercing the corporate veil applies only in three (3) basic areas,
namely: 1) defeat of public convenience as when the corporate fiction is used
as a vehicle for the evasion of an existing obligation; 2) fraud cases or when
the corporate entity is used to justify a wrong, protect fraud, or defend a
crime; or 3) alter ego cases, where a corporation is merely 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 are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another corporation.
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, 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.
The
first prong is the "instrumentality" or "control" test.
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 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."
The
second prong is the "fraud" test. 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."
The
third prong is the "harm" test. 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.
This
Court finds that none of the tests has been satisfactorily met in this case.
In
applying the alter ego doctrine, the courts are concerned with reality and not
form, with how the corporation operated and the individual defendant’s
relationship to that operation. With respect to the control element, it refers
not to paper or formal control by majority or even complete stock control but actual control which amounts to
"such domination of finances, policies and practices that the controlled
corporation has, so to speak, no separate mind, will or existence of its own,
and is but a conduit for its principal." In addition, the control
must be shown to have been exercised at the time the acts complained of took
place.
While
ownership by one corporation of all or a great majority of stocks of another
corporation and their interlocking directorates may serve as indicia of
control, by themselves and without more, however, these circumstances are insufficient to establish an alter ego relationship or
connection between DBP and PNB on the one hand and NMIC on the other
hand, that will justify the puncturing of the latter’s corporate cover. This
Court has declared that "mere
ownership by a single stockholder or by another corporation of all or nearly
all of the capital stock of a corporation is not of itself sufficient ground
for disregarding the separate corporate personality." This Court
has likewise ruled that the "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."