G.R. No. 199687, 24 March 2014

FACTS:

A complaint was instituted before the RTC against EIB Securities Inc. (E–Securities) for unauthorized sale of DMCI shares of private respondents Pacific Rehouse Corporation, Pacific Concorde Corporation, Mizpah Holdings, Inc., Forum Holdings Corporation, and East Asia Oil Company, Inc.

The RTC rendered judgment on the pleadings, directing the defendant [E–Securities] to return the plaintiffs’ [private respondents herein] DMCI shares, as of judicial demand. On the other hand, plaintiffs are directed to reimburse the defendant for the buy back price of KPP shares of stocks.

When the Writ of Execution was returned unsatisfied, private respondents moved for the issuance of an alias writ of execution to hold Export and Industry Bank, Inc. liable for the judgment obligation as E–Securities is “a wholly–owned controlled and dominated subsidiary of Export and Industry Bank, Inc., and is[,] thus[,] a mere alter ego and business conduit of the latter. E–Securities opposed the motion[,] arguing that it has a corporate personality that is separate and distinct from petitioner.

The RTC concluded that E–Securities is a mere business conduit or alter ego of petitioner, the dominant parent corporation, which justifies piercing of the veil of corporate fiction, and issued an alias writ of summons directing defendant EIB Securities, Inc., and/or Export and Industry Bank, Inc., to fully comply therewith.

Export and Industry Bank, Inc. (Export Bank) filed before the Court of Appeals a petition for certiorari with prayer for the issuance of a temporary restraining order (TRO) seeking the nullification of the RTC Order. The CA reversed the RTC Order and explained that the alter ego theory cannot be sustained because ownership of a subsidiary by the parent company is not enough justification to pierce the veil of corporate fiction. The records also do not show that Export Bank has complete control over the business policies, affairs and/or transactions of E–Securities. It was solely E–Securities that contracted the obligation in furtherance of its legitimate corporate purpose; thus, any fall out must be confined within its limited liability.

Hence, this petition.

ISSUE:

Whether E-Securities is merely an alter ego of Export Bank, that will make the latter liable.

RULING:

NO, E-Securities and Export Bank are two separate and distinct corporations. The Alter Ego Doctrine is not applicable.

“Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the “instrumentality” may be disregarded. The control necessary to invoke the rule is not majority or even complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal. It must be kept in mind that the control must be shown to have been exercised at the time the acts complained of took place. Moreover, the control and breach of duty must proximately cause the injury or unjust loss for which the complaint is made.”

The Court has laid down a three–pronged control test to establish when the alter ego doctrine should be operative:

(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 absence of any one of these elements prevents ‘piercing the corporate veil’ in applying the ‘instrumentality’ or ‘alter ego’ doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant’s relationship to that operation. Hence, all three elements should concur for the alter ego doctrine to be applicable.

In this case, all the foregoing circumstances, that would indicate that E-securities is just an alter ego of Export Bank, were however not properly pleaded and proved in accordance with the Rules of Court.

Albeit the RTC bore emphasis on the alleged control exercised by Export Bank upon its subsidiary E–Securities, “[c]ontrol, by itself, does not mean that the controlled corporation is a mere instrumentality or a business conduit of the mother company. Even control over the financial and operational concerns of a subsidiary company does not by itself call for disregarding its corporate fiction. There must be a perpetuation of fraud behind the control or at least a fraudulent or illegal purpose behind the control in order to justify piercing the veil of corporate fiction. Such fraudulent intent is lacking in this case.”

Moreover, there was nothing on record demonstrative of Export Bank’s wrongful intent in setting up a subsidiary, E–Securities. If used to perform legitimate functions, a subsidiary’s separate existence shall be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective business. To justify treating the sole stockholder or holding company as responsible, it is not enough that the subsidiary is so organized and controlled as to make it “merely an instrumentality, conduit or adjunct” of its stockholders. It must further appear that to recognize their separate entities would aid in the consummation of a wrong.

Furthermore, ownership by Export Bank of a great majority or all of stocks of E–Securities and the existence of interlocking directorates may serve as badges of control, but ownership of another corporation, per se, without proof of actuality of the other conditions are insufficient to establish an alter ego relationship or connection between the two corporations, which will justify the setting aside of the cover of corporate fiction.

The Court has declared that “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.” The Court has likewise ruled that the “existence of interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations.”

Thus, E-Securities is not merely an adjunct, a business conduit or an alter ego of Export Bank. These are two separate and distinct corporation. Export Bank cannot be held liable in behalf of E-Securities.

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