Quiz No.

11 – The Revised Corporation Code (General Provisions to Incorporation)

I
Defined the scope of application of the doctrine of piercing the corporate veil. Explain. (10%)

Answer: PNB vs. Hydro Resources Contractors Corporation, 693 SCRA 294

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.

II
Explain the Alter Ego Theory otherwise known as the Instrumentality Theory used to determine
whether corporate veil may be pierced.

Answer: Dimaampao, p. 239-240; PNB vs. Hydro Resources Contractors Corporation, 693
SCRA 294

This theory espouses 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. This contemplates of:

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.52 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.

III
DBP and PNB, both banking institutions, acquired the assets of MMIC Corporation. DBP and
PNB reorganized MMIC and named it as NMIC. Soon, NMIC contracted with HRCC for the
construction of a road within its premises. NMIC, however, failed to pay its obligation
prompting HRCC to sue NMIC, DBP, and PNB. HRCC averred that NMIC was owned by DBP
and PNB, the officers of DBP and PNB were also the officers of NMIC, and DBP and PNB
financed the operations of NMIC. HRCC argued that a parent corporation may be held liable for
the contracts or obligations of its subsidiary corporation where the latter was a mere agency,
instrumentality or adjunct of the parent corporation. Rule on HRCC’s contentions.

Answer: Dimaampao, pp. 242-243; PNB vs. Hydro Resources Contractors Corporation, 693
SCRA 294

HRCC’s contentions are not correct. 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. 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. There is nothing that would show that the corporate finances, policies and practices
of NMIC were dominated by DBP and PNB in such a way that NMIC could be considered to
have no separate mind, will or existence of its own but a mere conduit for DBP and PNB. On the
contrary, HRCC knew and acted on the knowledge that it was dealing with NMIC, not with
NMIC’s stockholders. HRCC was dealing with NMIC as a distinct juridical person acting
through its own corporate officers. There is no evidence that the juridical personality of NMIC
was used by DBP and PNB to commit a fraud or to do a wrong against HRCC. (PNB vs. Hydro
Resources Contractors Corporation, 693 SCRA 294).

IV
Mr. Pablo, a rich merchant in his early forties, was a defendant in a lawsuit which could subject
him to substantial damages. A year before the court rendered judgment, Mr. Pablo sought his
lawyer’s advice on how to plan his estate to avoid taxes. His lawyer suggested that he should
form a corporation with himself, his wife and his children (all students and still unemployed) as
stockholders and then transfer all his assets and liabilities to this corporation. Mr. Pablo and the
plaintiff sought to enforce this judgment. The sheriff, however, could not locate any property in
the name of Mr. Pablo and therefore returned the writ of execution unsatisfied. What remedy, if
any, is available to the plaintiff? (10%)

Answer: 1991 Bar Exam; Aquino, p. 76

The plaintiff can avail himself of the doctrine of piercing the veil of corporate fiction which can
be invoked when a corporation is formed or used in avoiding a just obligation. While it is true
that a family corporation may be organized to pursue an estate tax planning, which is not per se
illegal or unlawful, the factual settings, however, indicate the existence of a lawsuit that could
subject Mr. Pablo to a substantial amount of damages. It would thus be difficult for Mr. Pablo to
convincingly assert that the incorporation of the family corporation was intended merely as a
case of “estate tax planning”. (see Tan Boon Bee vs. Jarencio, G.R. No. 41337, 30 June 1988).

V
Petitioner is a corporation sole organized and existing in accordance with Philippine laws, with
Msgr. Trudeau, a Canadian citizen, as actual incumbent. It presented for registration a deed of
sale to the Register of Deeds of Cebu who denied it for lack of proof that at least 60% of the
capital property or assets of the corporation sole is owned or controlled by Filipino citizens. Was
the action of the Register of Deeds correct? Give reasons for your answers. (10%)

Answer: 1978 Bar; Aquino, p. 89

No. The action of the Register of Deeds was not correct. The requirement of at least 60% of
Filipino capital was never intended to apply to corporation sole because the same corporation is
only the administrator of the properties and it is well settled that it has no nationality. (Roman
Catholic Apostolic Administration of Davao, Inc. vs. Land Registration Commission, G.R. No.
L-8451, December 20, 1951).

VI
May a corporation composed entirely of aliens be organized and incorporated in the Philippines?
Explain. (10%)

Answer: 1970 Bar; Aquino, p. 182

Yes, if nationalization laws do not require ownership by Filipinos. Even under the Corporation
Code, it is only required that the majority incorporators and directors are residents of the
Philippines. Hence, so long as the majority are residents, the directors and incorporators can all
be foreigners. However, there are corporations where at least a majority or a higher percentage of
the outstanding shares of which are required by law to be owned by citizens of the Philippines.
For instance, the majority of the outstanding capital in public utilities and corporations which
own land must be owned by Filipinos. There are also corporations wherein the law allows
foreign equity equivalent to the majority or higher percentage of the outstanding capital stock.
For instance, export enterprises may generally be 100% foreign-owned.

VII
Redmont Consolidated Mines, Inc. (Redmont) filed before the Panel of Arbitrators (POA) of the
DENR separate petitions for denial of McArthur Mining, Inc. (McArthur), Tesoro and Mining
and Development, Inc. (Tesoro), and Narra Nickel Mining and Development Corporation (Narra)
applications for Mineral Production Sharing Agreement (MPSA) on the ground that they are not
“qualified persons” and thus disqualified from engaging in mining activities through MPSAs
reserved only for Filipino citizens.

McArthur Mining, Inc. is composed, among others, by Madridejos Mining Corporation

(Filipino) owning 5,997 out of 10,000 shares, and MBMI Resources, Inc. (Canadian) owning
3,998 out of 10,000 shares; MBMI also owns 3,331 out of 10,000 shares of Madridejos Mining
Corporation;

Tesoro and Mining and Development, Inc., is composed, among others, by Sara Marie Mining,
Inc. (Filipino) owning 5,997 out of 10,000 shares, and MBMI Resources, Inc. (Canadian)
owning 3,998 out of 10,000 shares; MBMI also owns 3,331 out of 10,000 shares of Sara Marie
Mining, Inc.;
Narra Nickel Mining and Development Corporation, is composed, among others, by Patricia
Louise Mining & Development Corporation (Filipino) owning 5,997 out of 10,000 shares, and
MBMI Resources, Inc. (Canadian) owning 3,998 out of 10,000 shares; MBMI also owns 3,396
out of 10,000 shares of Patricia Louise Mining & Development Corporation.

a. Is the Grandfather Rule applicable? (5%)

b. Whether or not McArthur, Tesoro and Narra are Filipino nationals. (5%)

Answer: Narra Nickel Mining vs. Redmont Consolidated Mines, 722 SCRA 382 (2014); 748
SCRA 455 (2015)

a. Yes. The instant case presents a situation which exhibits a scheme employed by
stockholders to circumvent the law, creating a cloud of doubt in the Court’s mind. To
determine, therefore, the actual participation, direct or indirect, of MBMI, the grandfather
rule must be used. The Strict Rule or the Grandfather Rule pertains to the portion in
Paragraph 7 of the 1967 SEC Rules which states, “but if the percentage of Filipino
ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality.” Under
the Strict Rule or Grandfather Rule Proper, the combined totals in the Investing
Corporation and the Investee Corporation must be traced (i.e., “grandfather”) to
determine the total percentage of Filipino ownership.

b. No. Petitioners McArthur, Tesoro and Narra are not Filipino since MBMI, a 100%
Canadian corporation, owns 60% or more of their equity interests. Such conclusion is
derived from grandfathering petitioners’ corporate owners. Xxx Noticeably, the
ownership of the “layered” corporations boils down to xxx group wherein MBMI has
joint venture agreements with, practically exercising majority control over the
corporations mentioned. In effect, whether looking at the capital structure or the
underlying relationships between and among the corporations, petitioners are not Filipino
nationals and must be considered foreign since 60% or more of their capital stocks or
equity interests are owned by MBMI.

VIII
Clark Field Taxi, Inc. (CFTI) held a concessionaire's contract with the Army Air Force Exchange
Services ("AAFES") for the operation of taxi services within Clark Air Base. Sergio F. Naguiat
was CFTI's president. CFTI stopped their taxi business within Clark Air Base because of the
phase-out of U.S. military presence thereat. However, CFTI failed to pay separation pay to the
taxi drivers. The taxi drivers filed a complaint against CFTI and Sergio Naguiat before the labor
arbiter for payment of their separation pay. Sergio Naguiat argued that he is just a mere officer
and stockholder of CFTI and, thus, could not be held personally accountable for corporate debts.

a. Is CFTI liable for corporate tort? (5%)

b. Is Sergio Naguiat liable for corporate tort? (5%)
Answer: Sergio F. Naguiat vs. NLRC, 269 SCRA 564 (1997); Cesar Villanueva, p. 502

Yes, to both (a) and (b). Our jurisprudence is wanting as to the definite scope of "corporate
tort." Essentially, "tort" consists in the violation of a right given or the omission of a duty
imposed by law. Simply stated, tort is a breach of a legal duty. Article 283 of the Labor Code
mandates the employer to grant separation pay to employees in case of closure or cessation of
operations of establishment or undertaking not due to serious business losses or financial
reverses, which is the condition obtaining at bar. CFTI failed to comply with this law-imposed
duty or obligation. Consequently, its stockholder who was actively engaged in the management
or operation of the business should be held personally liable.

IX
Petitioner was the Senior Vice-President of Philippine Blooming Mills, Inc. (PBMI). Sometime
in September to October 1980, PBMI, through petitioner, applied with the Rizal Commercial
Banking Corporation (respondent bank) for the issuance of commercial letters of credit to
finance its importation of assorted goods. Respondent bank approved the application, and
irrevocable letters of credit were issued in favor of petitioner. The goods were purchased and
delivered in trust to PBMI. Petitioner signed 13 trust receipts as surety, acknowledging delivery
of the said goods. Under the receipts, petitioner agreed to hold the goods in trust for the said
bank, with authority to sell but not by way of conditional sale, pledge or otherwise; and in case
such goods were sold, to turn over the proceeds thereof as soon as received, to apply against the
relative acceptances and payment of other indebtedness to respondent bank. In case the goods
remained unsold within the specified period, the goods were to be returned to respondent bank
without any need of demand. Thus, said "goods, manufactured products or proceeds thereof,
whether in the form of money or bills, receivables, or accounts separate and capable of
identification" were respondent bank’s property. When the trust receipts matured, petitioner
failed to return the goods to respondent bank, or to return their value amounting to
₱6,940,280.66 despite demands. Thus, the bank filed a criminal complaint for estafa. It was
contended that the petitioner, as Senior Vice-President of PBMI, executed the 13 trust receipts
and as such, was the one responsible for the offense. Thus, the execution of said receipts is
enough to indict the petitioner as the official responsible for violation of P.D. No. 115.
Petitioner asserts that the appellate court’s ruling is erroneous because (a) the transaction
between PBMI and respondent bank is not a trust receipt transaction; (b) he entered into the
transaction and was sued in his capacity as PBMI Senior Vice-President; (c) he never received
the goods as an entrustee for PBMI, hence, could not have committed any dishonesty or abused
the confidence of respondent bank; and (d) PBMI acquired the goods and used the same in
operating its machineries and equipment and not for resale.

a. Is the petitioner liable for estafa? (5%)

b. Is there a possibility that a corporation as a juridical entity be convicted of a crime? (5%)

Answer: Ching vs. Secretary of Justice, G.R. No. 164317, February 6, 2006; Aquino, p. 102

a. Yes. The Supreme Court rendered judgment in Allied Banking Corporation v.

Ordoñez, holding that the penal provision of P.D. No. 115 encompasses any act violative
of an obligation covered by the trust receipt; it is not limited to transactions involving
goods which are to be sold (retailed), reshipped, stored or processed as a component of a
product ultimately sold. The Court also ruled that "the non-payment of the amount
covered by a trust receipt is an act violative of the obligation of the entrustee to pay."

b. Yes. However, a corporation may be charged and prosecuted for a crime if the imposable
penalty is fine. Even if the statute prescribes both fine and imprisonment as penalty, a
corporation may be prosecuted and, if found guilty, may be fined.

X
In a complaint filed against XYZ Corporation, Luzon Trading Corporation allege that its
President & General Manager, who is also a stockholder, suffered mental anguish, fright, social
humiliation and serious anxiety as a result of the tortuous acts of XYZ Corporation. In its
counterclaim, XYZ Corporation claimed to have suffered moral damages due to besmirched
reputation or goodwill as a result of Luzon Trading Corporation’s complaint.

a. May Luzon recover moral damages based on the allegations in the complaint? (5%)
b. May XYZ Corporation recover moral damages? (5%)

Answer: 1998 Bar Exam

a. No. A corporation, being an artificial person, which has no feelings, emotions or senses,
and which cannot experience physical suffering or mental anguish, is not entitled to
moral damages.
b. Yes. When a juridical person has a good reputation that is debased, resulting in social
humiliation, moral damages may be awarded. Moreover, goodwill can be considered an
asset of the corporation.