Arco Pulp and Paper Co., Inc. v. Lim

G.R. No. 206806, 25 June 2014

FACTS:

Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw materials, under the name Quality Paper and Plastic Products, Enterprises, to factories engaged in the paper mill business. He delivers scrap papers to Arco Pulp and Paper Company, Inc. (Arco Pulp and Paper) through its Chief Executive Officer and President, Candida A. Santos. The parties allegedly agreed that Arco Pulp and Paper would either pay Dan T. Lim the value of the raw materials or deliver to him their finished products of equivalent value.

Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued a post-dated check dated as partial payment, with the assurance that the check would not bounce. When he deposited the check, it was dishonored for being drawn against a closed account.

On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of agreement where Arco Pulp and Paper bound themselves to deliver their finished products to Megapack Container Corporation, owned by Eric Sy, for his account. According to the memorandum, the raw materials would be supplied by Dan T. Lim, through his company, Quality Paper and Plastic Products.

Dan T. Lim sent a letter to Arco Pulp and Paper demanding payment, but no payment was made to him. Dan T. Lim filed a complaint for collection of sum of money with prayer for attachment.

The trial court rendered a judgment in favor of Arco Pulp and Paper and dismissed the complaint, holding that when Arco Pulp and Paper and Eric Sy entered into the memorandum of agreement, novation took place, which extinguished Arco Pulp and Paper’s obligation to Dan T. Lim.

Dan T. Lim appealed the judgment with the Court of Appeals. According to him, novation did not take place. The Court of Appeals rendered a decision reversing and setting aside the judgment and ordering Arco Pulp and Paper to jointly and severally pay Dan T. Lim.

Its motion for reconsideration having been denied, Arco Pulp and Paper and its President and Chief Executive Officer, Candida A. Santos, bring this petition for review on certiorari.

ISSUE:

Whether Candida A. Santos who is the Chief Executive Officer and President is solidarily liable with Arco Pulp and Paper Co., Inc.

RULING:

YES, Petitioner Candida A. Santos is solidarily liable with petitioner corporation.

As a general rule, directors, officers, or employees of a corporation cannot be held personally liable for obligations incurred by the corporation. However, this veil of corporate fiction may be pierced if complainant is able to prove, as in this case, that (1) the officer is guilty of negligence or bad faith, and (2) such negligence or bad faith was clearly and convincingly proven.

Here, petitioner Santos entered into a contract with respondent in her capacity as the President and Chief Executive Officer of Arco Pulp and Paper. She also issued the check in partial payment of petitioner corporation’s obligations to respondent on behalf of petitioner Arco Pulp and Paper. This is clear on the face of the check bearing the account name, “Arco Pulp & Paper, Co., Inc.” Any obligation arising from these acts would not, ordinarily, be petitioner Santos’ personal undertaking for which she would be solidarily liable with petitioner Arco Pulp and Paper.

We find, however, that the corporate veil must be pierced. In Livesey v. Binswanger Philippines: Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes. Under the doctrine, the corporate existence may be disregarded where the entity is formed or used for non-legitimate purposes, such as to evade a just and due obligation, or to justify a wrong, to shield or perpetrate fraud or to carry out similar or inequitable considerations, other unjustifiable aims or intentions, in which case, the fiction will be disregarded and the individuals composing it and the two corporations will be treated as identical.

According to the Court of Appeals, petitioner Santos was solidarily liable with petitioner Arco Pulp and Paper, stating that: In the present case, We find bad faith on the part of the [petitioners] when they unjustifiably refused to honor their undertaking in favor of the [respondent]. After the checkissued by [petitioner] Santos was dishonored for being drawn against a closed account, [petitioner] corporation denied any privity with [respondent]. These acts prompted the [respondent] to avail of the remedies provided by law in order to protect his rights.

Thus, Petitioner Santos cannot be allowed to hide behind the corporate veil. When petitioner Arco Pulp and Paper’s obligation to respondent became due and demandable, she not only issued an unfunded check but also contracted with a third party in an effort to shift petitioner Arco Pulp and Paper’s liability. She unjustifiably refused to honor petitioner corporation’s obligations to respondent. These acts clearly amount to bad faith. In this instance, the corporate veil may be pierced, and petitioner Santos may be held solidarily liable with petitioner Arco Pulp and Paper.

*Case digest by Doreena Pauline V. Aranal, JD – 4, Andres Bonifacio College, SY 2019 – 2020

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