Piercing the Veil of Corporate Fiction

Christian Andrew Labitoria Gallardo[1]

. Separate Juridical Personality

A corporation has a separate juridical personality which is different from its stockholders. This means that it is an entity independently recognized by law. The repercussion of having a separate identity recognized by law can stretch one’s imagination. Corporations can sue or be sued on its own, and it can own and manage properties under its own name. Moreover, it has the “right of succession”, meaning that it can survive beyond the lifetime of its incorporators and stockholders. Not only can it survive the death of the stockholders composing it, it can likewise withstand their incapacity and insolvency. Thus, it can easily contract long-term dealings because of the certainty of the continuity of its existence.

Concomitant to having a separate juridical personality, one of the most essential and well-sought features of a corporation is the concept of limited liability. Given that a corporation has a life of its own independently recognized by law, it can incur any liabilities separate from its stockholders.[1] Should the venture fail therefore, the creditors can generally only run after the corporation, and not any of its stockholders. In effect, the liability of each stockholder is limited to its share. This is without prejudice however to any stipulation in a contract providing that a stockholder shall be liable with the corporation for any amount due therein.

To better illustrate the concept of separate juridical personality and its concomitant feature of limited liability, let us have an example. Say, my bros and I decided to start a corporation, Know Your Worth, Kings Inc, in order to manufacture watches. Miggy, who is a convicted billionaire, invested a total of Two Million Pesos. Enzo, a known playboy and yacht enthusiast, invested a total of One Million Pesos. I invested a total of Four Million Pesos. The total capital of Seven Million Pesos, which shall be in the name of the established corporation, Know Your Worth, Kings Inc., was used to purchase high-precision machine tools. It then incurred a total of Eight Million Pesos in debt as it acquired gold, sapphire, stainless steel, tungsten and other supplies needed to make quality watches. Suppose however that after three years of operation, the corporation went bankrupt. Generally, the debtors cannot run after Miggy personally no matter how rich he may be. They may only run after Know Your Worth Kings Inc, with its depreciated assets composed of high-precision tools. If one of the suppliers of the sapphire however, Atty. Juancho, is wise enough to stipulate that in their contract, Miggy, a stockholder, shall be solidarily liable with Know Your Worth Kings, Inc, then such stipulation shall be controlling, and he may run after Miggy, or Know Your Worth Kings Inc, or both, to satisfy his claim.

Given that it can incur credit and be sued on its own, can it then be used as a shield for fraudulent or illegal activities? Obviously not. Allow me to introduce you to the concept of piercing the veil of corporate fiction.

IA. Piercing the Veil of Corporate Fiction.

Generally, in the absence of fraud or malice, the separate juridical personality of the corporation shall be respected, and no corporate liability may be enforced against a stockholder or a group of stockholders. This remains true even if the stockholder is the President of the corporation[2] or the owner of all or substantially all of the capital stock of the corporation.[3] The principle of separate juridical personality likewise applies in favor of corporations, such that a liability of a corporation may not be enforced against a sister or parent corporation even if they have a common director[4] or interlocking incorporators.[5]

However, the Courts would not hesitate to disregard the separate juridical personality bestowed upon the corporation if the corporation is being used to commit a wrong. This is the concept of “piercing the veil of corporate fiction”.[6] There is no hard and fast rule however in determining the “wrong” sufficient to “pierce the veil”.[7]

Given that the “veil” has been lifted, the stockholders composing the corporation shall be held directly liable for the acts of the corporation, as if they had done it directly.

It must be noted however that the power to “pierce the veil” is essentially the power of a court or tribunal vested with the power to make binding decisions. It cannot be exercised by a sheriff in enforcing a court judgment by collecting a debt of a corporation against a stockholder or a sister company.[8]

Cover photo from: unsplash.com

[1] San Juan Structural and Steel Fabricators Inc v CA, 296 SCRA 631 (1998). [2] Cruz v Dalisay, 152 SCRA 487 (1987). [3] DBP v NLRC, 186 SCRA 841 (1990). [4] Sesbreno v CA, 222 SCRA 466 (1993). [5] Mcleod v NLRC, 512 SCRA 222 (2007). [6] San Juan Structural and Steel Fabricators Inc v CA, 296 SCRA 631 (1998). [7] Concept Builders Inc v NLRC, 257 SCRA 149 (1996). [8] Cruz v Dalisay, 152 SCRA 482 (1987). [1] Christian Andrew Labitoria Gallardo is a recent graduate of the Ateneo School of Law with a Juris Doctor degree, and is currently an associate of the Sangalang and Gaerlan, Business Lawyers, a law firm specializing in labor, corporate and business law. You may reach him through a phone call or message (09157042132) or via email (andrew.gallardo@paladinslaw.org)