In the Philippines, courts can disregard the separate legal identity of a corporation to hold its owners or parent company liable for its debts. However, this power, known as piercing the corporate veil, is only applied when the corporation is used to commit fraud, injustice, or wrongdoing. The Supreme Court has affirmed that a court must first have jurisdiction over a corporation before it can consider piercing its corporate veil and that the alter ego doctrine is not applicable without proving the elements of control, wrong, and injury or loss.

When Does a Parent Company Answer for a Subsidiary’s Debts? Examining Corporate Veil Piercing

This case revolves around Pacific Rehouse Corporation’s attempt to enforce a judgment against Export and Industry Bank (Export Bank) for the liabilities of its subsidiary, EIB Securities Inc. (E-Securities). The core legal question is whether Export Bank can be held liable for E-Securities’ debts through the alter ego doctrine, which allows courts to pierce the corporate veil and disregard the separate legal identities of related corporations.

The legal framework for piercing the corporate veil in the Philippines is well-established. The Supreme Court has consistently held that a corporation possesses a distinct legal personality separate from its stockholders and other affiliated corporations. This separation is a legal fiction designed to promote convenience and justice. However, this separation is not absolute. The veil of corporate fiction may be pierced when it is used to defeat public convenience, justify wrong, protect fraud, or defend crime. It can also be pierced when the corporation is merely an adjunct, business conduit, or alter ego of another corporation, as mentioned in Concept Builders, Inc. v. National Labor Relations Commission.

To successfully invoke the alter ego doctrine, certain elements must be proven. As the court stated in Philippine National Bank v. Hydro Resources Contractors Corporation:

(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.

These elements must concur; the absence of even one element is fatal to a claim for piercing the corporate veil. The petitioners argued that E-Securities was a mere alter ego of Export Bank, citing factors such as Export Bank’s ownership of the majority of E-Securities’ stocks, shared directors and officers, and the provision of financial support. However, the Court found that these factors, while indicative of control, were insufficient to establish an alter ego relationship without proof of fraud, wrong, or unjust loss caused by Export Bank’s control over E-Securities. Even if the elements mentioned were proven, the petitioners failed to plead and prove it in accordance with the Rules of Court.

An important procedural aspect highlighted by the Supreme Court is the necessity of acquiring jurisdiction over a corporation before attempting to pierce its corporate veil. The Court emphasized that a corporation not impleaded in a suit cannot be subjected to the court’s process of piercing the veil of its corporate fiction. In Kukan International Corporation v. Reyes, the Court elucidated:

The principle of piercing the veil of corporate fiction, and the resulting treatment of two related corporations as one and the same juridical person with respect to a given transaction, is basically applied only to determine established liability; it is not available to confer on the court a jurisdiction it has not acquired, in the first place, over a party not impleaded in a case.

This principle underscores the importance of due process. A corporation must be properly apprised of a pending action against it and given the opportunity to present its defenses. Without proper service of summons or voluntary appearance, any judgment against the corporation is null and void. In this case, Export Bank was not impleaded in the original suit against E-Securities and was only brought into the picture during the execution stage. The Court held that the Regional Trial Court (RTC) erred in attempting to enforce the alias writ of execution against Export Bank without first acquiring jurisdiction over it.

The RTC relied on the cases of Sps. Violago v. BA Finance Corp. et al. and Arcilla v. Court of Appeals to justify its actions. However, the Supreme Court distinguished these cases, clarifying that while the doctrine of piercing the corporate veil can be applied even when the corporation is not formally impleaded, the party ultimately held liable must have been properly brought before the court. In both Violago and Arcilla, the individuals held liable (Avelino Violago and Calvin Arcilla, respectively) were already parties to the case, ensuring their right to due process was respected. In contrast, Export Bank was not a party to the original suit against E-Securities, making the attempt to enforce the judgment against it a violation of its due process rights.

The Supreme Court reiterated that 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 also emphasized that the wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was never unintended may result from an erroneous application.

FAQs

What was the key issue in this case?	The key issue was whether Export and Industry Bank (Export Bank) could be held liable for the debts of its subsidiary, EIB Securities Inc. (E-Securities), by piercing the corporate veil under the alter ego doctrine.
What is the alter ego doctrine?	The alter ego doctrine allows a court to disregard the separate legal identity of a corporation and hold its owners or parent company liable for its debts if the corporation is merely a conduit or instrumentality of the other entity.
What are the elements required to prove the alter ego doctrine?	The elements are (1) control by the parent corporation, (2) use of that control to commit fraud or wrong, and (3) proximate causation of injury or unjust loss to the plaintiff.
Why was the alter ego doctrine not applied in this case?	The Court found that while Export Bank exercised control over E-Securities, there was no evidence that this control was used to commit fraud, wrong, or any unjust act that caused injury to the petitioners.
Why was Export Bank not considered liable in this case?	Export Bank was not a party in the original suit against E-Securities, so the court did not have jurisdiction over Export Bank, violating its right to due process.
What is the significance of establishing jurisdiction over a corporation before piercing its corporate veil?	Establishing jurisdiction ensures that the corporation has been properly notified of the action and has an opportunity to defend itself, upholding its right to due process.
Can mere stock ownership and interlocking directorates justify piercing the corporate veil?	No, mere stock ownership and interlocking directorates are insufficient to justify piercing the corporate veil without proof of fraud or other public policy considerations.
What did the Court emphasize regarding the application of the piercing the corporate veil doctrine?	The Court emphasized that the doctrine should be applied with caution and only when the corporate fiction has been misused to commit injustice, fraud, or crime.

This case reinforces the importance of respecting the separate legal identities of corporations unless there is clear evidence of misuse or wrongdoing. It also serves as a reminder that procedural requirements, such as establishing jurisdiction over a party, cannot be circumvented even when seeking to enforce a seemingly just claim.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Pacific Rehouse Corporation vs. Court of Appeals and Export and Industry Bank, Inc., G.R. No. 201537, March 24, 2014