G.R. No. 202454, 25 April 2017


Petitioner and Respondent entered into a contract wherein the former would pay the latter a monthly rent for the use of one its packing machines. Later on Petitioner failed to pay the rent, this led to the Respondent demanding the unpaid amounts.

Petitioner alleges that the unpaid amounts have been extinguished by compensation as the Respondent is the same entity as Processing Partners and Packaging Corporation(PPPC) who owes the petitioner for the mobilization of its product line, and that Respondent even owes the Petition the balance of the amount agreed upon.

Respondent counters that it possesses a separate and distinct personality from the PPPC and cannot be held liable for its obligations.

The RTC and the CA ruled in favor of the Respondent hence this petition.


Was there legal compensation between the parties?


There was no such thing.

We have reviewed the evidence on record and have found no cogent reason to disturb the findings of the court a quo that ATSI is distinct and separate from PPPC.

Any piercing of the corporate veil must be done with caution.23 As the CA had correctly observed, it must be ce11ain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of rights. Moreover, the wrongdoing must be clearly and convincingly established.

CMCI’s alter ego theory rests on the alleged interlocking boards of directors and stock ownership of the two corporations. The CA, however, rejected this theory based on the settled rule that mere ownership by a single stockholder of even all or nearly all of the capital stocks of a corporation, by itself, is not sufficient ground to disregard the corporate veil. We can only sustain the CA’s ruling. The instrumentality or control test of the alter ego doctrine requires not mere majority or complete stock control, but complete domination of finances, policy and business practice with respect to the transaction in question. The corporate entity must be shown to have no separate mind, will, or existence of its own at the time of the transaction.

Nothing in the narration above supports CMCI’s claim that it had been led to believe that ATSI and PPPC were one and the same; or, that ATSI’s collectible was intertwined with the business transaction of PPPC with CMCI. In all its pleadings, CMCI averred that the P4 million mobilization fund was in furtherance of its agreement with PPPC in 2000.

Prior thereto, PPPC had been a toll packer of its products as early as 1996. Clearly, CMCI had been dealing with PPPC as a distinct juridical person acting through its own corporate officers from 1996 to 2003 while CMCI’s dealing with ATSI began only in August 2001.

The fraud test, which is the second of the three-prong test to determine the application of the alter ego doctrine, requires that the parent corporation’s conduct in using the subsidiary corporation be unjust, fraudulent or wrongful. Under the third prong, or the harm test, 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 has to be established. None of these elements have been demonstrated in this case. Hence, we can only agree with the CA and RTC in ruling out mutuality of parties to justify the application of legal compensation in this case.

*Case digest by Roger Angielo V. Atenta, JD-IV, Andres Bonifacio College, SY 2019-2020