Piercing the corporate veil

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By Kelvin Lee

Question of Law

Thursday, July 3, 2014


I HAD written in a previous column on the advantages of a corporation, which included limited liability on the part of a shareholder. As per the Supreme Court, “one of the advantages of a corporate form of business organization is the limitation of an investor’s liability to the amount of investment, which flows from the legal theory that a corporate entity is separate and distinct from its stockholders.” (San Juan Structural v. Court of Appeals, 295 SCRA 631).

This simply means that if ever any litigation or dispute occurs, a claimant can only go after the corporation, or beyond that, the claimant can hold the stockholder liable only up to his shareholdings in the said corporation. Thus, the term limited liability. This rule is so steadfast that it has come to be known by some as the “corporate veil” or the “fiction of the corporate veil”

However, there are exceptions to the limited liability rule. There is the legal concept of piercing the corporate veil. As explained by the Supreme Court:

“A corporation is an artificial being 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 the persons composing it, as well as from any other legal entity to which it may be related. This is basic.

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.” (Sarona v. NLRC, GR No. 185280, 18 January 2012).

The Supreme Court calls it piercing because the concept necessarily requires piercing or removing the fiction of the corporate veil separating the shareholders from claimants or litigants.

Now this doctrine applies only in three basic areas:

“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.” (Sarona, Id.)

However, it must be noted that the corporate veil can only be pierced after due care and caution has been exercised by the courts. “The rule is that a court should be careful in assessing the milieu where the doctrine of the corporate veil may be applied. Otherwise an injustice, although unintended, may result from its erroneous application. Thus, cutting through the corporate cover requires an approach characterized by due care and caution.” (Phil. National Bank vs. Hydro Resources Contractors Corp., .G.R. Nos. 167530, 167561, 16760311. March 13, 2013)

Thus the law has made provisions to respect the fiction of the corporate veil, as well as provisions on how to pierce it, in order to ensure that justice prevails and fraud is prevented.

***

The opinions expressed herein are solely of Atty. Lee. This column does not constitute legal advice nor does it create a lawyer-client relationship with any party. You can reach Atty. Lee at lvlawoffices@gmail.com

Published in the Sun.Star Davao newspaper on July 03, 2014.

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