G.R. No. 166282, 13 February 2013
On several occasions, respondent International Exchange Bank (iBank), granted loans to Hammer Garments Corporation (Hammer), covered by promissory notes and deeds of assignment.
These were made pursuant to the Letter-Agreement, between iBank and Hammer, represented by its President and General Manager, Manuel Chua (Chua) a.k.a. Manuel Chua Uy Po Tiong, granting Hammer a P25 Million-Peso Omnibus Line. The loans were secured by a P9 Million-Peso Real Estate Mortgage by Goldkey Development Corporation (Goldkey) over several of its properties and a P25 Million-Peso Surety Agreement signed by Chua and his wife, Fe Tan Uy (Uy).
However, Hammer defaulted in the payment of its loans, prompting iBank to foreclose on Goldkey’s third-party Real Estate Mortgage. At the same time, for failure of Hammer to pay the deficiency, iBank filed a Complaint for sum of money against Hammer, Chua, Uy, and Goldkey before the RTC.
Uy claimed that she was not liable to iBank because she never executed a surety agreement in favor of iBank. Goldkey, on the other hand, also denies liability, averring that it acted only as a third-party mortgagor and that it was a corporation separate and distinct from Hammer.
Meanwhile, iBank applied for the issuance of a writ of preliminary attachment, covering the properties under the name of Goldkey.
The RTC, in its Decision,ruled in favor of iBank. While it made the pronouncement that the signature of Uy on the Surety Agreement was a forgery, it nevertheless held her liable for the outstanding obligation of Hammer because she was an officer and stockholder of the said corporation. The RTC agreed with Goldkey that as a third-party mortgagor, its liability was limited to the properties mortgaged. It came to the conclusion, however, that Goldkey and Hammer were one and the same entity. As such, the piercing of the veil of corporate fiction was warranted. Uy, as an officer and stockholder of Hammer and Goldkey, was found liable to iBank together with Chua, Hammer and Goldkey for the deficiency.
Hence, these petitions filed separately by the heirs of Uy and Goldkey.
1. Whether Uy can be held liable to iBank for the loan obligation of Hammer as an officer and stockholder of the said corporation under the doctrine of piercing of the veil of corporate fiction.
2. Whether Goldkey can be held liable for the obligation of Hammer for being a mere alter ego of the latter.
1. Uy is not liable; The piercing of the veil of corporate fiction is not justified.
Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. Following this principle, obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities. A director, officer or employee of a corporation is generally not held personally liable for obligations incurred by the corporation. Nevertheless, this legal fiction may be disregarded if it is used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues. This is consistent with Sec.31 of the Corporation Code of the Philippines.
Before a director or officer of a corporation can be held personally liable for corporate obligations, however, the following requisites must concur:
(1) the complainant must allege in the complaint that the director or officer assented to patently unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad faith; and
(2) the complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith.
In this case, it was not alleged nor proven that Uy committed an act as an officer of Hammer that would permit the piercing of the corporate veil. At most, Uy could have been charged with negligence in the performance of her duties as treasurer of Hammer by allowing the company to contract a loan despite its precarious financial position. Furthermore, if it was true, as petitioners claim, that she no longer performed the functions of a treasurer, then she should have formally resigned as treasurer to isolate herself from any liability that could result from her being an officer of the corporation.
Nonetheless, these shortcomings of Uy are not sufficient to justify the piercing of the corporate veil which requires that the negligence of the officer must be so gross that it could amount to bad faith and must be established by clear and convincing evidence. Gross negligence is one that is characterized by the lack of the slightest care, acting or failing to act in a situation where there is a duty to act, willfully and intentionally with a conscious indifference to the consequences insofar as other persons may be affected.
It behooves this Court to emphasize that the piercing of the veil of corporate fiction is frowned upon and can only be done if it has been clearly established that the separate and distinct personality of the corporation is used to justify a wrong, protect fraud, or perpetrate a deception.
Indeed, there is no showing that Uy committed gross negligence. And in the absence of any of the aforementioned requisites for making a corporate officer, director or stockholder personally liable for the obligations of a corporation, Uy, as a treasurer and stockholder of Hammer, cannot be made to answer for the unpaid debts of the corporation.
2. Goldkey is a mere alter ego of Hammer
Goldkey needs to be reminded that it is being sued not as a consequence of the real estate mortgage, but rather, because it acted as an alter ego of Hammer. Accordingly, they must be treated as one and the same entity, making Goldkey accountable for the debts of Hammer. What iBank sought was redress from Goldkey by demanding that the veil of corporate fiction be lifted so that it could not raise the defense of having a separate juridical personality to evade liability for the obligations of Hammer.
Under a variation of the doctrine of piercing the veil of corporate fiction, when two business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that two corporations are distinct entities and treat them as identical or one and the same.
While the conditions for the disregard of the juridical entity may vary, the following are some probative factors of identity that will justify the application of the doctrine of piercing the corporate veil, as laid down in Concept Builders, Inc. v NLRC:
(1) Stock ownership by one or common ownership of both corporations;
(2) Identity of directors and officers;
(3) The manner of keeping corporate books and records, and
(4) Methods of conducting the business.
These factors are unquestionably present in the case of Goldkey and Hammer, as observed by the RTC, as follows:
1. Both corporations are family corporations of defendants Manuel Chua and his wife Fe Tan Uy.
2. Hammer Garments and Goldkey share the same office and practically transact their business from the same place.
3. Defendant Manuel Chua is the President and Chief Operating Officer of both corporations. All business transactions of Goldkey and Hammer are done at the instance of defendant Manuel Chua who is authorized to do so by the corporations.
The promissory notes subject of this complaint are signed by him as Hammer’s President and General Manager. The third-party real estate mortgage of defendant Goldkey is signed by him for Goldkey to secure the loan obligation of Hammer Garments withplaintiff “iBank”.
4. The assets of Goldkey and Hammer are co-mingled. The real properties of Goldkey are mortgaged to secure Hammer’s obligation with creditor banks.
5. When defendant Manuel Chua “disappeared”, the defendant Goldkey ceased to operate despite the claim that the other “officers” and stockholders still around and may be able to continue the business of Goldkey, if it were different or distinct from Hammer which suffered financial set back.
Based on the foregoing findings of the RTC, it was apparent that Goldkey was merely an adjunct of Hammer and, as such, the legal fiction that it has a separate personality from that of Hammer should be brushed aside as they are, undeniably, one and the same.
*Case digest by Doreena Pauline V. Aranal, JD – 4, Andres Bonifacio College, SY 2019 – 2020