G.R. No. L- 23893, 29 October 1968


Jose Villarama was an operator of a bus transportation pursuant to two certificates of public convenience granted him by the Public Service Commission (PSC). Later, he sold the certificates to the Pangasinan Transportation Company, Inc. (Pantranco) with the condition that the seller (Villarama) “shall not for a period of 10 years, apply for any TPU service identical or competing with the buyer.”

Barely three months thereafter, a corporation called Villa Rey Transit, Inc. (the Corporation) was organized with a capital stock of P500,000.00 divided into 5,000 shares of the par value of P100.00 each; P200,000.00 was the subscribed stock; Natividad Villarama (wife of Jose Villarama) was one of the incorporators, and she subscribed for P1,000.00; the balance of P199,000.00 was subscribed by the brother and sister-in-law of Jose Villarama; of the subscribed capital stock, P105,000.00 was paid to the treasurer of the corporation, Natividad.

In less than a month after its registration with the SEC, the Corporation bought five certificates of public convenience and 49 buses from one Valentin Fernando. Later, the Sheriff of Manila levied on 2 of the 5 certificates, in favor of Eusebio Ferrer, judgment creditor, against Fernando, judgment debtor. A public sale was conducted. Ferrer was the highest bidder. Ferrer sold the two certificates to Pantranco.

The Corporation filed a complaint against Ferrer, Pantranco and the PSC for the annulment of the sheriff’s sale. Pantranco, on its part, filed a third-party complaint against Villarama, alleging that Villarama and/or the Corporation was disqualified from operating the two certificates in question by virtue of the previous agreement. The trial court declared null and void the sheriff’s sale of two certificates of public convenience in favor of Ferrer and the subsequent sale thereof by the latter to Pantranco and declaring Villa Rey Transit, Inc., to be the lawful owner of the said certificates of public convenience.

Pantranco disputes the correctness of the decision insofar as it holds that Villa Rey Transit, Inc. (Corporation) is a distinct and separate entity from Villarama. Ferrer, for his part, challenges the decision insofar as it holds that the sheriff’s sale is null and void.


Whether or not the stipulation between Villarama and Pantranco binds Villa Rey Transit, Inc.


YES. The restrictive clause in the contract entered into by the Villarama and Pantranco is also enforceable and binding against the said Corporation. The rule is that a seller or promisor may not make use of a corporate entity as a means of evading the obligation of his covenant. The evidence has disclosed that Villarama, albeit was not an incorporator or stockholder of the Corporation, his wife, however, was an incorporator and was elected treasurer of the Corporation.

The evidence further shows that the initial cash capitalization of the corporation was mostly financed by Villarama; he supplied the organization expenses and the assets of the Corporation, such as trucks and equipment; there was no actual payment by the original subscribers of the amounts of P95,000.00 and P100,000.00 as appearing in the books; Villarama made use of the money of the Corporation and deposited them to his private accounts; and the Corporation paid his personal accounts. The foregoing circumstances are strong persuasive evidence showing that Villarama has been too much involved in the affairs of the Corporation to altogether negate the claim that he was only a part-time general manager. They show beyond doubt that the Corporation is his alter ego.

The doctrine that a corporation is a legal entity distinct and separate from the members and stockholders who compose it is recognized and respected in all cases which are within reason and the law. When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or crime, the veil with which the law covers and isolates the corporation from the members or stockholders who compose it will be lifted to allow for its consideration merely as an aggregation of individuals.

*Case digest by Radolf Zell Adasa JD-IV, Andres Bonifacio Law School, SY 2019-2020