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Corporation (2019) MIDTERM REVIEWER ATTY.

GAVIOLA-CLIMACO

Introduction ⚫ Corporation: The corporation can acquire more


SOLE PROPRIETORSHIP, PARTNERSHIP investments since there are unlimited
AND CORPORATION DISTINGUISHED opportunities for the increase in capitalization.
Consequently, this makes it feasible for the
ATTY G: What comes to mind when you hear the word corporation to engage in bigger business.
“corporation”? ⚫ Partnership: Because of the principle of trust and
confidence, only those chosen may invest and be a
S: A business entity and is composed of a number of partner. Capitalization is limited to the
people. contribution of the partners and loans from
creditors.
ATTY G.: So a grouping of persons, the purpose of
which is to do business. But is the corporation the only AS TO THE NUMBER OF PERSONS COMPOSING IT
vehicle to do business? ⚫ Corporation: needs at least 5 incorporators but
not more than 15
S: No. ⚫ Partnership: atleast 2 partners would be enough

TYPES OF BUSINESS ORGANIZATIONS: AS TO MANNER OF CREATION


1. Sole Proprietorship • Corporation: created through a legal process and
A form of business organization with only one requires SEC approval via Certificate of
proprietary owner. It is when a person personally or a Incorporation
single individual conducts business under his own • Partnership: contractual, created by mere agreement
name or under a business name.
AS TO LIABILITIES
Atty G: What distinguishes a sole proprietorship is • Corporation: limited liability
that the individual is the business. You cannot o liability of the corporation is distinct from the
separate the individual from the business. It is the liabilities of the persons composing it and the
most basic form of business organization. liabilities of the persons composing the
corporation, as a general rule, are only limited
2. Partnership to their contribution to the corporation
Articl 1767 NCC: By the contract of o in other words, stockholders are liable only to
partnership, two or more persons bind themselves to the extent of their contributions in the
contribute money, property, or industry to a common corporation
fund, with the intention of dividing the profits among • Partnership
themselves. o General partnership: liability can extend to
Two or more persons may also form a personal assets
partnership for the exercise of a profession. ▪ partnership properties are exhausted prior
to partners’ personal properties
Atty G: The essence of partnership is that it is o Limited partnership: limited partner’s liability
“contractual in nature”. It is created by mere consent. is limited to contribution
The moment the partners agree as to what they will
contribute and how to conduct business, there will AS TO MANAGEMENT
now be a contract of partnership between them. You • Corporation: managed by Board of Directors acting
don’t need to register the partnership with the SEC in together (not even individually) who can bind the
order to create it. corporation
Aside from being a contract, a partnership is o Ex. to open a bank account, an individual
a separate and distinct entity from that of the director cannot perform such in the name of the
partners. It is basically a bridge between sole corporation as the bank will require a board
proprietorship and a corporation. Partnership is a resolution
contract and at the same time an entity, a business
• Partnership: generally every partner is an agent of
organization thus, reflecting its peculiarity.
the partnership and can bind the partnership
3. Corporation
AS TO TRANSFERABILITY OF INTEREST
Section 2, Corporation Code of the
• Corporation: shares of stock can be transferred
Philippines: An artificial being created by operation of
without seeking the consent of the other
law, having the right of succession and the the powers,
stockholders
attributes and properties expressly authorized by law
o corporation’s existence is independent of the
or incident to its existence.
composition of its Board or stockholders
CORPORATION VS. PARTNERSHIP • Partnership: transfer of partner’s interest requires
the consent of all partners
AS TO CAPITALIZATION (added by the transcriber)
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o change in composition of partners So the Supreme Court said , go back to general rule
automatically dissolves partnership because of the separate personality of a corporation
and its officer and stockholders the officer and the
AS TO SUCCESSION stockholders does not become liable of the obligation
• Corporation: right of succession exists of the corporation by the mere fact of their being an
o heirs of stockholder will succeed in the rights officer.
• Partnership: no right of succession

General Provisions DOCTRINE OF PIERCING THE CORPORATE VEIL


CORPORATION DEFINED
Section 2. Corporation defined
A corporation is an artificial being It is a recognition that while a corporation is granted by law
created by operation of law, having the right of a personality distinct and separate from its stockholder -
succession and the powers, attributes and properties meaning its a separate person, its an artificial being which
expressly authorized by law or incident to its existence. is recognized as a person under the law separate from its
stockholder and its members. That artificial being is only
Attributes of a Corporation created by law, a mere legal fiction, because in reality there
1. An artificial being is no real person there. That recognition as a person is a
2. Created by operation of law
mere legal fiction created by law so that when that artificial
3. Has the right of succession
being is used as a means to commit fraud or injustice then
4. Has the powers, attributes and properties expressly
authorized by law or incident to its existence the law allows that this legal fiction will be taken down. The
law allows that it will pierce the veil of this separate entity
The bank filed a collection case against Chua and and consider it as one with the persons opposing it. That is
Goldkey. There are two issues in this case : first issue. the reason behind the Doctrine of Piercing the Veil.
Whether or not UY the wife of Chua can be personally
liable being the officer of hammer garment. Solidbank Corporation vs
second issue. Whether or not Goldkey can be peirce by Mindanao FerroAlloy Corporation
the veil being the surety where its property has been
used as the mortgage on the loan by the hammer
garment ? Facts:
Philippine corporation Maria Cristina Chemical Industries
With repspect to the first issue on the w/n Uy the wife (MCCI) and three Korean corporations: Ssangyong
of Chua can be personally liable , the Supreme Court Corporation, Pohang Iron and Steel Company and Dongil
said no because the corporation has its distinct and Industries Company, Ltd., entered into a joint venture
separate personality distinct from its officer.
under the name of Mindanao Ferroalloy Corporation. The
officers of these corporation comprised the Board
Atty: what happened to Fe tan Uy there was a finding members of Mindanao Ferroalloy Corporation: Guevara as
there that she did not sign the loan agreement? What the President and Chairman, Hong the Vice President,
happened there? Teresita Cu as a member. Subsequently, the Board of
There was a finding even at the trial court level but why Directors authorized Guevara to secure a loan of 30Million
did the trial court still render her liable for the pesos from Solidbank.
obligation of hammer ? What was the ground?
The Mindanao Ferroalloy started their operation in April
So the ground was not that because she signed the 1991. However, the indebtedness acquired from Solidbank
surety agreement the ground was due to the fact that ballooned to 200.4Million pesos while its asset is only
she was an officer because it was found that its not 65.4Million pesos. The Corporation executed Promissory
here real signature so the only basis that the court has Note signed by Teresita Cu and Jong-Won Hong. They also
in making here liable on the obligation of hammer is
executed a Deed of Assignment in favor of the Bank
the mere fact that she is an officer and a director of
covering its rights, title and interests: entire proceeds of
Hammer . So what happened there? What did the
Supreme Court say?Is that a suffucient ground to make drafts drawn under Irrevocable Letter of Credit a Quedan.
her liable? The SC said it is not a sufficient ground that Hong and Cu also affixed their signatures for the
UY will be held liable in this case because of the Corporation. The Corporation, also, through Hong and
sepatate and distinct personality of the corporation. Teresita Cu, executed a Trust Receipt Agreement, by way of
additional security for said loan, the Corporation
Atty: So is she liable by the mere fact that she is an undertaking to hold in trust, for the Bank, some of its
officer? property.
Student : No atty she is not liable.

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Shortly after the execution of the said deeds, the that loan obligation that was created is not their personal
Corporation stopped its operations. The Corporation failed obligation. It is the obligation of the corporation. They were
to pay its loan. Hence, a collection of sum of money was only acting as representatives of the corporation. The act
filed against the Corporation imploding Guevarra, Hong, and obligation was entered into by the corporation and not
and Cu as joint and solidary debtors. the officers even if they are the ones representing the
corporation. Why is that?
Question: What was the basis of Solidbank for impleading
the officers of FerroAlloy as solidary debtors of the loan? Student: This is because of the artificial being created by law
to a corporation. Since there is an artificial created to a
Student: Hong and Cu signed the promissory note. Now the corporation by law then the officers, members, and
bank is saying that they signed as a co-maker and not just a representatives of such should not be held liable since their
representative of the said corporation. personality is different.

However the Supreme Court said that they actually signed ATTY. GAVI: If the corporation has an obligation just
in one set of signature, as a mere representative of the because it was contracted through a particular officer, does
corporation. It could have been different if they affixed it now mean that it becomes the liability of the officer?
their signature twice. Why?

Question: Why does it matter if they are signing as Section 2. A corporation is an artificial being. Being an
representative of the corporation or signing under their artificial being its obligations are separate and distinct of its
own name? officers, directors, and stockholders.

Student: It is different because a corporation has a separate Question: Why would it have been different if the officers
and distinct personality as opposed to its officers. So signed the second time around?
because of that the officers should not be held liable with
the liabilities of the corporation if they did not act in bad Student: If they sign the second time around the Supreme
faith or there has no fraud or illegality of the transaction, Court was saying that they are already signing in their own
and that they are authorized to do such transaction. In this capacity and not mere representative of the corporation.
case, it was shown that they were authorized proven by the By signing, it means that they are really liable to the loan.
Board Resolution.
IF THEY SIGN THE SECOND TIME, WHAT
Question: Let’s go back to that contention you mention, if HAPPENS NOW TO THAT OBLIGATION OF SOLID
there are two sets of signature that would have made them BANK?
liable. Why?
SOLID BANK CASE CONTINUATION…..
Student: There is a principle in the Negotiable Instruments
They are now solidary liable because they already bind
Law that was discussed in the case, if you are only signing
themselves not as officers of corporation but in their
as a representative of a particular corporation and that you personal capacity. The first time they signed, they are
are actually authorized to represent the corporation you representing the corporation, if they sign the second
should not be held liable. time (done na ang corporation na part), SC said they
are now signing on their own behalf, they are now
Question: Why not? obliged in their personal capacity but in the case at
hand, THEY DID NOT, they only signed once. Hence,
Student: This is because your personality is distinct from the they signed on behalf of the corporation.
corporation and you are merely acting on behalf of the
corporation. The officers were not made joint and solidary liable
with the corporation. It is only the corporation that is
Question: So, when they sign the loan documents as liable to the loan contracted by its officers.
Being an artificial entity, a corporation can only act
representatives of the corporation. Whose obligation was
through its board of directors ( no physical hands to
created?
sign contract). It acts through its officers or board of
directors. When they act on behalf of the corporation,
Student: The obligation created is that of the corporation it doesn’t mean that the obligations created are the
and of the Bank, not of their personal capacity. They only obligations of the board or its officers because a
acted as a representative of the corporation. corporation is an artificial being having a separate and
distinct personality from its stockholders and officers.
ATTY. GAVI: That is correct, because they signed as officers But if the representatives would voluntarily take on
of the corporation and representing the corporation then themselves the obligation, that’s allowed. In which case
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they are now solidarily liable with the corporation


because they bound themselves as such. Zambrano Case
CONCEPT OF ARTIFICIAL BEING
CLARIFICATION: REMEDY LEFT FOR &
CREDITORS WHEN THE DOCTRINE OF PIERCING PIERCING OF THE VEIL
THE CORPORATE VEIL IS DISREGARDED. WHEN Facts:
THE OFFICERS AND STOCKHOLDERS ARE NOT
PERSONALLY LIABLE. Zambrano et al were employees of PhilCarp and then
they were dismissed because PhilCarp ceased
ATTY GAVI: Remedy is against the corporation, operation on the grounds of serious business
when it is proved that the grounds of piercing the reversals. So upon termination, they filled a case
corporate veil are not present or when they did not against PhilCarp and Pacific contending that they
bind themselves voluntarily, the creditors have no were illegally dismissed since Phil carp did not incur
other remedy but to go after the corporation. When the serious business losses because as a matter of fact
assets of the corporation are not enough, they will have they are earning. They also want to implead Pacific
to go through insolvency proceeding and follow the because they are mere Alter Ego given the fact that
rule in preference of credits. the assets of Phil Carp was transferred to Pacific and
Just because a corporation is liable it does not mean some of the employees of Phil CArp were absorbed by
that its people are liable also, as long as they did not Pacific
voluntarily bind themselves and as long as there are no
grounds to pierce the veil.
The Court resolved that there was no illegal dismissal
WHAT ABOUT SIGNING AS CO-MAKER OR CO-
DEBTOR? Atty: So Zambrano was employed by which
company?
That is not piercing the veil, they are liable because of B:by Phil Carp
contract. There is no need to pierce the veil, no need to
prove that they were in bad faith. Piercing the veil is Atty: What did Zambrano want done? And
based on different grounds. Why?
B:Wants Phil carp to be liable for illegal dismissal and
Review from the morning discussion: at the same time to make Pacific Carpet also solidarily
The first attribute of a corporation is based on Section liable.
2 of Corporation Code is that a Corporation is an Because they contend that there was no serious
artificial being which means it has a personality which business losses incurred by Phil Carp , there was
is separate and distinct from its stockholders, board of unfair labor practice.
directors and officers which means that the
corporation can own properties and it can incur Atty: And what happened to the operations of
obligations in its own name and that whichever PhilCarp according to Zambrano?
properties that are owned by the corporation or Their operations of Phil Carp was merely transferred
whatever obligations that are incurred by the to Pacific
corporation are its own properties and obligations and
not that of its stockholders, directors or officers. Atty: So according to Zambrano the closure of Phil
Carp was merely a pretense just to get them out of
Meaning, by fiction of law the person of the their employment, to terminate their employment
corporation is separate from the person of when in fact the operations of Phil Carp was merely
stockholders that the latter may compose the transfered to Pacific which they own Subsidiarily . So
corporation but they are not the corporation. However, now they are claiming from both Phil Carp (initial
in certain instances the fiction or the veil of the employer) and according them ( Zambrano ) ALTER
corporation and its stockholders may be lifted in which EGO Pacific Carpet.
case the corporation is considered as one with its board
of directors and stockholders. There are only very Atty: Now what happened in the case?
specific instances where this is allowed because the law B:First there was no finding of Unfair labor pracrice ,
considers that corporation as separate entity for the since the petitioner failed to prove and they were not
convenience of the parties involved and to facilitate able to cite a specific ground for unfair labor practice
economic transactions. If this artificial being is being
used to commit injustice or to defraud the public, the Second , there was no iillegal dismissal. Since in as
law will lift the veil because this is only a legal fiction, much as no one is compelled to open a business, no
it’s not reality. The law will pierce the veil of legal one is also compelled to sustain a business.
fiction and consider the corporation as one with its
stockholders. CORPORATION AS AN ARTIFICIAL BEING

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Atty: Before going to the issue of Piercing of veil, this now pacific carpet should also be liable to them so
case also discuses on the effects about the they’re not claiming against stockholders, board of
Corporation being an artificial being. directors and officers of Philippine carpet, they’re
claiming against the subsidiary of Philippine carpet.
We mentioned earlier that as an Artificial being , it Thus the rule on artificial being apply in this case. The
has a separate personality form its directors, Supreme Court said that a corporation has a
stockholders and officers. Besides those people who personality separate and distinct from the persons
else has a Corporation distinct and separate composing it as well as from any other legal entity
personality? which it may be related. The artificial entity is
applicable not just to the persons composing the
B: From any other legal entities to which it may be corporation but also to any other legal entity which it
related may be related. In regards to piercing, it is allowed only
in three instances; first is when there is evasion of
Atty: Not just stockholders, directors or officers obligation, second is when there is protection of
being the natural person but also any other legal commission of a wrong and third is in alter ego cases
entity to which they were related. which is one given in this case. In alter ego cases, it
must passed the three test, first is the instrumentality
Doctrine: The Concept of corporation being an test, second is fraud test and third is the harm test. In
Artificial being does not only apply to the directors, instrumentality test, the mere fact that one corporation
officers or stockholders (natural persons) it also is controlled by a person, a single person does not
applies to ANY OTHER ENTITY to whom the permit the piercing because it must also be prove that
corporation may be related, even if that entity is a such control extends to policy making, financial
(Juridical entity) activities and etc. with regards to the fraud, there must
be a clear and proof of fraud that the corporation was
For example: used to commit a fraud. And in the harm test, there
must be a causal relationship between the use of the
You have A-B-C-D-E(natural person-stockholder) of identity of the corporation and the harm committed. In
Corporation B and C. this case, the mere fact that Pacific is a subsidiary will
not allow piercing. With regards to the transfer of
Under the Concept of Artificial entity , Corporation B assets, it was found out that the transfer of asset was
is separate and distinct from ABCDE (stockholders- actually a sale from Philippine carpet to Pacific Carpet
BOD-officers) IN the same way Corporation C is which explains the claim of the petitioners why there
separate and distinct from ABCDE. But at the same are income generated by the Philippine carpet.
time Corporation C is separate and distinct form Atty G: what do you mean by evasion of obligation?
Corporation C.
Student: since a corporation has a separate entity of its
own, the owners may protect themselves by creating an
entity that would absorbed the obligations that they
PIERCING OF VEIL ISSUE may incur and therefore shield them on the doctrine of
limited liability. What happens then is the whole
The court said that , the mere fact that Pacific as a obligation of the supposed obligors may not be
Subsidiary of Phil Carp it will not permit the peircing enforced against them because of the shield of the
of veil . corporate fiction so the creditors will be prejudiced on
the use of the corporation. In which case, the legal
fiction will not be allowed to prevail.
Under the concept of artificial entity, corporation B is
separate and distinct from A, C, D and E, the Atty. G: so one, if the corporate vehicle is used to evade
stockholders, board of directors and officers. In this obligations, the corporate then will be pierced and the
way, corporation C is separate and distinct from stockholders will still be made liable for the obligation
corporation A, B, D and E, the stockholders, board of of the corporation.
directors and officers and at the same time corporation
C is separate and distinct from corporation D. The Student: second is the protection of commission of a
separate entity applies not only to your stockholders, wrong, since the corporation is a separate entity, it can
board of directors and officers but also to any other only act through its agents, so a corporation cannot be
legal entity in which the corporation is created. In this held, for example, criminally liable. So if there are
case, we have the Philippine carpet being the perpetrators, they might say for example commit
stockholder of the pacific carpet so now the employee’s estafa through the corporation then the corporate
contention are that Philippine carpet merely fiction will be used for them.
transferred its operations to pacific carpet and now
they are trying to say that Philippine Carpet committed Atty. G: so when the corporate fiction is used to
unfair labor practice by transferring its operations and defraud or commit a crime then a corporate fiction will
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be pierced and the stockholders will be held liable. The defraud, using that control and you cause harm to another
third instance is alter ego cases. person because of that control. In this case it is true there
was control by Phil Carpet of pacific carpet. It owned 100%
Student: The alter ego principle is that, a corporation of the shares. However it was also found that there was no
is created by another person or juridical person fraud and there was no harm because Phil carpet’s reason
through which the transactions of that person is for foreclosure was legitimate. It was shown by the audited
directly done through the corporation, the essence of financial statements of the corporation that it was really
alter ego principle is that the person who is using the
losing money and based on the labor code that is a
corporation in shielding himself from any possible
sufficient ground to terminate the employment of your
liabilities that may arise from its transactions. The
employees. There was no fraud and technically there was
difference between that and the first one is that the first
no harm. So the SC said that the alter ego principle is not
one, there might be a pre-existing intent to defraud
applicable in this case to justify piercing the veil. Do you
whereas the third one there might be none, that he is
understand?
just shielding himself from any possible liability.
***Atty calls 3 students to discuss the case of Martinez vs
Atty. G:The essence of the alter ego principle is CA. Nafrustrate si Atty ani kay wrong ila mga answers so
CONTROL. If somebody is controlling the corporation wala na lang nako gitranscribe apil. Ang ending si Atty ang
such that the corporation basically does not have its nidiscuss sa relationship sa parties.
own mind because a person is controlling not just A: So you have here CLL which is a foreign corporation
majority but complete dominion not only of its engaged in buy and sell of molasses. One of its suppliers
finances but also its policies and business practice so was MarTiera, which is based in the Philippines and was
whatever the decision of this controlling person is owned partially by RJL Martinez fishing corporation. RJL on
considered the decision of the corporation, so control, the other hand was owned by Ruben Martinez. Okay? so
not just financial but also with respect to business that was the relationship of the parties.
decisions and operations and you use this control in
order to commit a fraud or wrong, and that the control
causes harm or injury to other persons. In this case, the
corporation is merely your alter ego such that whatever CONTINUATION OF MARTINEZ CASE.
obligations incurred by the corporation because of
your control can be attributed to you and that person
controlling the corporation becomes liable. .. so that was the relationship of the parties.

So when do you apply the alter ego principle? There are (What’s the letter of credit for? How does it
three test work?

Student: the instrumentality, the fraud and the harm. Atty. Gavi: It is a financial instrument it’s used
The instrumentality test means the person has control basically as a bridge between buyer and seller
including the financial activities and policies. Second is especially if they are located in different countries.
fraud test, the entity is used to commit fraud. Lastly,
the harm test, there is a causal connection between the • Illustration: if I were a buyer, I am not going
injury to the person and the use of the corporate to pay you until I get the goods because if I pay
fiction. The ruling of the SC in this case is that, there you what if I don’t get the goods? On the other
was no alter ego or control because while there is hand if I was the seller, I’m not also going to
control in the subsidiary it does not amount to alter pay you if I don’t get paid, because what
ego. There is absence of harm and fraud. happens if I ship the goods, its already with
you and you don’t pay me? Okay ra if we’re in
the same City, what if you’re in HK and I’m in
Cebu. So how do you reconcile? You do a letter
A: Why not? of credit transaction. So as the buyer, you’re
S: because the move of Philippine carpet to cease its going to go to a bank, open a letter of credit
operation is lawful and there is no unfair labor practice and then the bank will contact its
committed. correspondent bank where the seller is, and
A: so in order for there to be piercing of the veil based on then you will say “hey, seller, I have here a
alter ego the three elements must occur together. It is not letter of credit in your favor, you ship the
because you own all the stocks in a certain corporation and goods to the buyer then give me the shipping
documents, the moment you give the complete
another corporation owns the stocks in another
shipping docs, me and the bank will pay you”
corporation, it does not mean automatically that you will so the seller knowing that he will get paid by
apply the alter ego rule. All three elements must occur. the bank will ship the goods, the bank now will
There was complete control, there was an intention to turn around and tells the buyer “hey mr. buyer
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the good are on their way, these are the docs S: W. Martinez was able to withdraw that amount, so
you will need to claim the goods, now pay me that’s the reason why the BPI collected that amount
what I paid the seller”) from CLL.

So that is what was used in this case, we have here CLL Atty. Gavi: (reiterations) So when everything was
buying molasses from Mar Tierra, so as part of that said and done, that $340k transferred to Mar Tierra
transaction, CLL opened a letter of credit in favor of was supposed to be deducted from their deposit with
Mar Tierra. So Mar Tierra, shipped goods to CLL the bank, but the bank did not deduct, so it just
knowing that its going to get paid under the letter of recorded a receivable, and then worse is it allowed CLL
credit. But ultimately, the letter of credit is a and its representatives to deduct the full amount of the
liability of the buyer because iya man I deposit without taking into consideration that they still
reimburse ang bank, so the letter of credit is had an obligation in the amount of $340k. So now, the
the liability of CLL. bank was left with no money in its hand but with a
receivable with CLL. So what happened?
Atty. Gavi: What happened next?
S: So the bank tried to collect from CLL and Ruben and
S: Gonzales requested the respondents (BPI) to Gonzales, but they refused.
transfer the $340k dollars of the 1 st money market
placement account into CLL’s private account and vice
versa. So, CLL transferred $340k to Mar Tierra’s ....the bank tried to collect from CLL, Ruben and
account. Gozales but they refused. Eventually, they discovered
that they really have a payable to BPI after auditing
Atty. Gavi: When Gonzales instructed the bank to their account. BPI filed a collection case. Since they
transfer, he was acting on behalf of whom? refused to pay BPI asked the court to pierce the
corporate veil, claiming that since the majority of the
S: CLL stockholders are the same.

Atty Gavi: So Gonzales, a representative of CLL The respondents to the complaint filed by the bank are
instructed the bank that “okay, you transfer the CLL, Ruben, Lacson, Gonzales, and Wilfredo Martinez.
amount to Tierra” it was in payment of their obligation Wilfredo is a stockholder of CLL. Ruben is not a
to Mar Tierra. Did the bank comply? Then what stockholder of CLL. He is the stockholder of RJL corp
happened? which is a stockholder of Martiera. Martiera is the
supplier of CLL and they also have common
S: Yes, then a few months later, Martinez instructed stockholders. The SC ruled that the mere identity
the bank to transfer (same request as Gonzales). of the officers is not sufficient to pierce the
corporate veil.
Atty. Gavi: What happened after the letter of credit The persons, as ruled by the court, who were not held
was opened? liable are Ruben and Gonzales. Wilfredo Martinez and
Lacson were held liable because they signed a surety
S: After the letter of credit was opened, Wilfredo and agreement and not because of piercing the veil. This is
Ruben Martinez, and Gonzales opened the money because they voluntarily bound themselves. Ruben was
market placement value with BPI, after that Gonzales one of the signatories of the account but he did not sign
instructed BPI to transfer the $340k to the account of the surety agreement.
Mar Tierra. However, that time the money placement
value has not yet matured, so what BPI did was I think The RTC found the claim of the bank to be valid. That
it’s termed as account receivable for CLL and then that yes, CLL, the two Martinez and Lacson are liable under
amount was transferred to Mar Tierra. By the time that the piercing of the veil. That they were being used to
the money placement value has matured, they just defraud the bank. The CA agreed that they are liable
allowed Wilfredo to withdraw the $340k. except for Gonzales, considering that he was merely an
employee and not a stockholder. Ruben went to the SC
Atty. Gavi: So in other words, the funds transferred on the ground that there was no basis on the judgment
to Mar Tierra was supposed to be from the Money against him. Why? Because the rest of the stockholders
Market placement when it was not yet matured the signed a surety agreement. Having signed such will
bank held off on debiting that account, what it did make one liable jointly and solidary liable with CLL.
instead is it recorded a receivable from CLL. You do not even need to pierce the veil because they
But when the money market placement matured, did bound themselves voluntarily by contract.
the bank debit the account with the money transferred
to Mar Tierra? they did not deduct. So what happened What about Ruben? The ground for including him as
next? one of the solidary debtor merely on the basis of
piercing the veil/ the alter ego doctrine. According to
the SC, it pierced the veil to CLL to Martiera to RJL and
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to Ruben who was the majority stockholder of RJL, Hammer ceased operations. But the reason which
saying that all of these persons are one and the same. cannot found in any other case is the commingling
That CLL was merely a paper corporation and sham of assets of the corporations. This means that
used to defraud the bank. The only proof that they had when Hammer contracted the loan, Goldkey was also
is the common stockholding between Martiera and benefited by it. Whatever benefits that Hammer
CLL. THAT IS NOT A SUFFICIENT GROUND TO received from the loan was also enjoyed by Goldkey. SC
APPLY THE ALTER EGO PRINCIPLE. As we go said that you are under the same control, you have the
back to the case of Zambrano, we apply the alter ego same person running the corps, and that you
when there is a concurrence of 3 elements: (control, commingled you assets, even without mentioning
fraud, injury) fraud, or harm which is a requirement under the alter
THREE TESTS: ego doctrine, Goldkey is still liable.
1. CONTROL TEST – not just financial, but
COMPLETE business and operating control Teacher: Whatever benefits that Hammer receives
control. from the proceeds of the loan, it is assumed that
2. INSTRUMENTALITY TEST – that control Goldkey also enjoyed it because they co-mingled their
must be used to defraud. assets. So now that Hammer cannot pay, Goldkey
3. HARM TEST – that fraud cause harm to the should be held liable. Are we clear? Are we clear class?
Questions so far?
other party.

In this case, the bank was able to establish only the Student: For purposes of the exam, if given the
common shareholdings between CLL and Martiera. situation that the companies co-mingled their assets, is
But they have no proof to show that Martiera was using it safe to answer that we can provide the case?
CLL to conduct fraud. In fact, the SC found that there
was a valid business transaction between CLL and T: Yes, you cite the case. Student, CIR vs Norton &
Martiera. Martiera also has other clients other than Harrison.
CLL. The SC found that there was no fraud. And since
there was no fraud, there was not harm. And since S: It is about a case where Norton and Harrison
these two elements are missing then you cannot apply company came into an agreement with Jackbilt where
the alter ego doctrine. So, there can be no piercing the it manufacture concrete blocks. They came into an
veil as far as Ruben is concerned. agreement where Jackbilt will manufacture these
concrete blocks and Norton will sell it to the public, and
UY VS. INTERNATIONAL AUS BANK it was found out that, when Norton and Harrison sells
it to the public, sells it, it will receive a lesser amount
The bank granted a loan to Hammer which is secured and the rest of the (inaudible) of the amount goes to
by the property of Goldkey under a surety agreement Jackbilt and.
signed by Chua and his wife. Hammer defaulted with
the payment. The property of Goldkey was foreclosed. T: So how many transactions were there in the sale of
But there is still an outstanding balance of the loan. the goods? How did they structure their transactions?
Bank filed a collection case against Hammer, Goldkey
and Chua. The issues are: whether or not UY can be S: It was like a buy and sell structure, buy and sell …
held personally liable, being an officer of Hammer; and
whether or not the alter ego doctrine is applicable in T: Who buys?
this case.
S: Norton and Harrison buys the concrete blocks from
There was a finding by the trial court that Uy did not Jackbilt, and then upon buying them, Norton and
sign the loan agreement. But she was made liable solely Harrison will sell it to the public. And the proceeds of
because she is an officer and director of the the sale will go to, will go to both of them. The bigger
corporation. That is the only basis that the court had. amount goes to Jackbilt and the lesser amount serves
The SC said that it is not a sufficient ground to hold her as profit or the compensation in selling the concrete
liable because a corporation has a personality blocks to Norton and Harrison.
distinct from its officers and stockholders. The
officer does not become liable with the obligations of T: Okay, take note class that this case happened 1964
the corporation by that mere fact. pa or 1940’s ang facts occured. So lahi pa, the corporate
income tax then was different. So you have here two
What about Goldkey? It was ruled that the corporate companies, one is the manufacturing, the other is the
veil must be pierced on the ground that Goldkey is a distributor. Okay? What did they have in common?
mere alter ego of Hammer because of certain
circumstances such as they have common 1:26 - 1:29
stockholders, both are family corporations by Chua
who is the president of both corporations, they share
the same office, when Chua disappeared, Goldkey and
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S: Three years after their agreement or their


arrangement rather, here comes Norton and Harrison T: What was the effect of the two transactions, the
eventually buying the assets of Jackbilt. scheme done by Norton and Jackbilt? What was the
effect of that of their tax liability? Why is the CIR
T: Assets? They purchased the assets? saying that there should only be one sale? How many
sales were there? Two diba? Jackbilt to Norton then
S: Outstanding shares of stocks. Norton to the public. But now the CIR is saying that no,
there should only be one sale because is the same as
T: They purchased the shares. What’s the Norton. Why would the CIR do that? Of course, they
difference between purchasing assets and want to get more taxes. How is that scheme, nga iduha
purchasing shares? For example you have A ka transaction, depriving the CIR of taxes? Why?
company and B company. What is the Because lain-lain man nga sales price. Lain ang price
difference if “A company will buy all the assets from Jackbilt to Norton, and they declared that as
of B company” or “A company buying the different revenue. Okay? At that time, the lower the
outstanding shares of B company”? Is it the revenue, the lower your tax rate. Mura xag individual
same or are they different transactions? They the taxation style bah. Have you have your tax already?
are different. So don’t interchange them. Then from Jackbilt to Norton, another sale. So daku
What’s the difference? man ang cost, so again lower na sad ang tax. Diba?
Because they broke the transactions into two, ni-
When you buy assets, you acquire the business. qualify sila for a lower bracket sa tax rates. You
You acquire the business because now you understand? Whereas if ila lang tu giusa nga sale, daku
have all the assets of that other entity but you ang revenue, that means that they go to the higher
don’t acquire another entity. Do you get it? You bracket. So the CIR is saying that no, there
acquire the assets of B so you acquire its should be only one sale, direct from Norton to
business but you don’t acquire B. Get it? the public. We disregard from Jackbilt to
Norton because that first sale was only used to
But if you buy shares, you are not only buying create a buffer to lower their tax. So you
the business, you are buying the entity. Do you understand? So what happened?
get it? So rather than buying the business, you
buy the entity, you buy shares. So you acquire CIR VS. NORTON AND HARRISON COMPANY
a subsidiary. So be careful with that. That’s not GR NO. L-17618, AUGUST 31, 1964
the same. So in practice, you can do an asset
purchase or a share purchase. Two very xx---direct from Norton to the public. We disregard the
different transactions. sale from Jackbilt to Norton because that first sale was
only used to create a buffer to lower their tax.
Okay? So what was the transaction here?
General Rule, just because one corporation
S: The sale of the concrete blocks, or the purchase of owns another, it doesn’t mean that they are one and the
the assets of the, or the outstanding shares of stocks same corporation; they are still separate and distinct.
However, there are circumstances to show that the
T: The shares of Jackbilt were purchased by Norton. In separate personality is used to evade an obligation then
effect, Norton now acquired control. that separate personality will be disregarded and both
corporations will be considered as one.
1:29 - 1:33
So in this case, the Supreme Court found that Norton
T: So Norton and Harrison became the sole and Harrison and Jackbilt were structed in such a way
stockholder of Jackbilt. They now have control over as to evade paying the larger amount of tax; and it was
Jackbilt. What happened next? shown that basically the two corporations were under
the same control. It was Norton and Harrison who
S: The CIR (inaudible) collecting sales tax said that the financed the operations of Jackbilt. Since there was a
sale, it should disregard the entity of Jackbilt since its finding that the structure was made that the two-
shares were acquired by Norton. The sales tax should pronged sale was made just to avail of a lower tax, then
be imposed upon the sales made by Norton to the the Supreme Court said that Yes, we disregard the
public, and not the sale by Jackbilt to Norton. separate entity and consider that there should only be
one sale—the sale from Norton and Harrison to the
T: Why? public. So that sale is assessed with a higher tax rate,
and Norton and Harrison were held liable for
S: Because after the, after Norton purchased the deficiency tax.
outstanding shares of Jackbilt, the CIR said that
(inaudible) Jackbilt is now the corporation of Norton (End of Norton Case Discussion)
since it exercises control over Jackbilt.
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There are instances where piercing the veil will works. It is used to establish a liability but it is not used
not apply. For example, in the case of Francisco to acquire jurisdiction.
Motors, what happened there was the reverse.

FRANCISCO MOTORS CORPORATION VS. CA


GR NO. 100812, JUNE 25, 1999

The stockholders had a payable to lawyer.


What the lawyer did was that he sued the stockholders
and the Corporation. Nagreverse siya, diba ang
piercing the veil is when you sue the stockholders for
the liabilities of the Corporation? In this case, you’re
suing the Corporation for the liability of the
stockholders. The Supreme Court said na well, there’s
no definite rule on how to apply here piercing the veil,
but definitely, it is for the protection of the public, diba.
For the protection of the public, when you are using
that legal fiction of that corporation to defraud the
public, that’s the essence of piercing the veil. You’re
using that legal fiction to defraud the public and in
order to escape liability. Is that applicable in this case?
It’s not, because in this case, the legal entity of the
Corporation was not being used to defraud the public.
In fact, the obligation that was being claimed was the
personal obligation of the stockholders, so the
Supreme Court refused to apply the piercing the veil
principle here.

It’s not black and white, but generally, piercing


the veil will only apply if you want to make the
stockholders liable for the liabilities of the
Corporation, not the other was around. Why? You go
back to the essence of piercing the veil—if you are using
the legal entity to defraud, so if naa na siya then you
pierce the veil. In this case, there was no such
allegation that the Corp was being used to defraud the
lawyer. So, the Supreme Court, it will not apply.

KUKAN INTERNATIONAL CORPORATION VS. HON.


AMOR REYES
GR NO. 182729, SEPTEMBER 29 2010

Here, you have a supplier not being paid.


Supplier sued Kukan Inc., and then Kukan Inc. stopped
appearing in court, so that judgment was made and
then Kukan Inc. was held liable. However, when they
served the writ of execution, they found that there was
another Corporation occupying the premises, Kukan
International Corporation—same stockholder but
different corporation. So now you have the supplier
trying to enforce the judgment of Kukan Inc. against
Kukan International Corporation and the justification
is piercing the veil. Can he do that? No. The Supreme
Court said that while piercing the veil can be used as a
basis to impute liability, it cannot be used as a basis to
acquire jurisdiction. That’s a different matter—
acquisition of jurisdiction is something that’s
technical. You cannot just enforce a judgment against
Corporation A when the judgment was against
Corporation B under the guise of piercing the veil. The
Supreme Court said that it is not how piercing the veil
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