PNB v. Hydro Resources Contractors Corporation

G.R. No. 165730, 13 March 2013

FACTS:

Petitioners DBP and PNB foreclosed on certain mortgages made on the properties of Marinduque Mining and Industrial Corporation (MMIC). As a result of the foreclosure, DBP and PNB acquired substantially all the assets of MMIC and resumed the business operations of the defunct MMIC by organizing NMIC.DBP and PNB owned 57% and 43% of the shares of NMIC, respectively, except for five qualifying shares. The members of the Board of Directors of NMIC, were either from DBP or PNB.

Subsequently, NMIC engaged the services of Hercon, Inc. After computing the payments already made by NMIC, Hercon, Inc.found that NMIC still has an unpaid balance. Hercon, Inc. made several demands on NMIC, including a letter of final demand and when these were not heeded, a complaint for sum of money was filed in the RTC seeking to hold petitioners NMIC, DBP, and PNB solidarily liable for the amount owing Hercon, Inc.

Subsequent to the filing of the complaint, Hercon, Inc. was acquired by HRCC in a merger. This prompted the amendment of the complaint to substitute HRCC for Hercon, Inc.

Thereafter, President Corazon C. Aquino issued Proclamation No. 50 creating the APT for the expeditious disposition and privatization of certain government corporations and/or the assets thereof. Pursuant to the said Proclamation, DBP and PNB executed their respective deeds of transfer in favor of the National Government assigning, transferring and conveying certain assets and liabilities, including their respective stakes in NMIC. In turn and on even date, the National Government transferred the said assets and liabilities to the APT as trustee under a Trust Agreement. Thus, the complaint was amended for the second time to implead and include the APT as a defendant.

In its answer,NMIC claimed that HRCC had no cause of action. It also asserted that its contract with HRCC was entered into by its then President without any authority. Moreover, the said contract allegedly failed to comply with laws, rules and regulations concerning government contracts. NMIC further claimed that the contract amount was manifestly excessive and grossly disadvantageous to the government. NMIC made counterclaims for the amounts already paid to Hercon, Inc.

DBP, PNB, and APT all invoked lack of cause of action and the defense of being a separate juridicial personality of NMIC.

After trial, the RTC as well as the CA rendered a Decision in favor of HRCC. Both Courts pierced the corporate veil of NMIC and held DBP and PNB solidarily liable with NMIC.

The respective motions for reconsideration of DBP, PNB, and APT were denied.Hence, these consolidated petitions.

ISSUE:

Whether or not there is sufficient ground to pierce the veil of corporate fiction.

RULING:

NO, the doctrine cannot be invoked.

In Sarona v. National Labor Relations Commission has defined the scope of application of the doctrine of piercing the corporate veil:

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.

At the same time, Case law lays down a three-pronged test to determine the application of the doctrine piercing the corporate veil based on 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 absence of any of these elements prevents piercing the corporate veil.

In applying the 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.With respect to the control element, it refers not to paper or formal control by majority or even complete stock control but actual control which amounts to “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.” In addition, the control must be shown to have been exercised at the time the acts complained of took place.

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. This 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.” This 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.”

In this case, nothing in the records shows 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, the evidence establishes that HRCC knew and acted on the knowledge that it was dealing with NMIC, not with NMIC’s stockholders. The letter proposal of Hercon, Inc., HRCC’s predecessor-in-interest, regarding the contract for NMIC’s mine stripping and road construction program was addressed to and accepted by NMIC. The various billing reports, progress reports, statements of accounts and communications of Hercon, Inc./HRCC regarding NMIC’s mine stripping and road construction program in 1985 concerned NMIC and NMIC’s officers, without any indication of or reference to the control exercised by DBP and/or PNB over NMIC’s affairs, policies and practices. Also, DBP and PNB maintain an address different from that of NMIC. There was insufficient proof of interlocking directorates. There was not even an allegation of similarity of corporate officers. Instead of evidence that DBP and PNB assumed and controlled the management of NMIC, HRCC’s evidence shows that NMIC operated as a distinct entity endowed with its own legal personality.

In relation to the second element, to disregard the separate juridical personality of a corporation, the wrongdoing or unjust act in contravention of a plaintiff’s legal rights must be clearly and convincingly established; it cannot be presumed. Without a demonstration that any of the evils sought to be prevented by the doctrine is present, it does not apply. There being a total absence of evidence pointing to a fraudulent, illegal or unfair act committed against HRCC by DBP and PNB under the guise of NMIC, there is no basis to hold that NMIC was a mere alter ego of DBP and PNB.

As regards the third element, in the absence of both control by DBP and PNB of NMIC and fraud or fundamental unfairness perpetuated by DBP and PNB through the corporate cover of NMIC, no harm could be said to have been proximately caused by DBP and PNB on HRCC for which HRCC could hold DBP and PNB solidarily liable with NMIC.

Considering that, under the deeds of transfer executed by DBP and PNB, the liability of the APT as transferee of the rights, titles and interests of DBP and PNB in NMIC will attach only if DBP and PNB are held liable, the APT incurs no liability for the judgment indebtedness of NMIC. As such assignee, therefore, the APT incurs no liability with respect to NMIC other than whatever liabilities may be imputable to its assignors, DBP and PNB.

Thus, only NMIC as a distinct and separate legal entity is liable to pay its corporate obligation to HRCC.

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

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