In Joselito Hernand M. Bustos v. Millians Shoe, Inc., the Supreme Court clarified that a corporation’s debts are generally not the debts of its stockholders. The Court emphasized that the doctrine of separate juridical personality shields stockholders from personal liability for corporate obligations unless specific conditions, such as those outlined for close corporations actively managed by stockholders, are met. This ruling protects individual assets from corporate liabilities, reinforcing the principle of limited liability for stockholders.

Separate Lives: Can a Corporation’s Debtors Target the Owners’ Assets?

The case revolves around a property owned by Spouses Fernando and Amelia Cruz, who were also stockholders and officers of Millians Shoe, Inc. (MSI). The property was levied by the City Government of Marikina for unpaid real estate taxes and subsequently auctioned off to Joselito Hernand M. Bustos. Meanwhile, MSI underwent rehabilitation proceedings, and a Stay Order was issued, encompassing the subject property. Bustos sought to exclude the property from the Stay Order, arguing that it belonged to the spouses, not the corporation, and that he had won the bidding before the Stay Order was annotated. The lower courts denied his motion, leading to this Supreme Court decision.

The central legal question is whether the properties of Spouses Cruz, as stockholders of MSI, could be held liable for the corporation’s obligations and thus be included in the Stay Order. The Court of Appeals (CA) affirmed the Regional Trial Court’s (RTC) decision, reasoning that MSI was a close corporation and its stockholders were personally liable for its debts. However, the Supreme Court disagreed, setting aside the CA’s rulings for lack of basis. The Supreme Court underscored the importance of adhering to the definition of a close corporation as defined in Section 96 of the Corporation Code, which requires specific provisions in the articles of incorporation regarding the number of stockholders, restrictions on stock transfer, and prohibitions on public stock offerings.

Sec. 96. Definition and applicability of Title. – A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. x x x.

The Court emphasized that merely alleging a corporation is a close corporation is insufficient; there must be evidence, particularly the articles of incorporation, to support such a claim. Since neither the CA nor the RTC presented any evidence from MSI’s articles of incorporation, their conclusion that MSI was a close corporation lacked factual and legal support. This aligns with the ruling in San Juan Structural and Steel Fabricators. Inc. v. Court of Appeals, where the Supreme Court held that a narrow distribution of ownership does not, by itself, make a close corporation. Courts must examine the articles of incorporation to determine if the required provisions are present.

Moreover, the Supreme Court addressed the CA’s misinterpretation of Section 97 of the Corporation Code. The CA incorrectly concluded that stockholders of a close corporation are automatically liable for corporate debts. The Court clarified that Section 97 only specifies that stockholders are subject to the liabilities of directors, not that they are directly liable for the corporation’s debts. Only Section 100, paragraph 5, of the Corporation Code explicitly provides for personal liability of stockholders in a close corporation, and even then, specific requisites must be met.

Sec. 100. Agreements by stockholders. –

x x x x

5. To the extent that the stockholders are actively engaged in the management or operation of the business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves. Said stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance.

The Supreme Court highlighted that none of these requisites were alleged in the case of Spouses Cruz, nor did the lower courts explain the factual circumstances that would justify holding them personally liable for “corporate torts.” Therefore, the Court reaffirmed the **doctrine of separate juridical personality**, which establishes that a corporation has a legal existence distinct from its owners. This doctrine gives rise to the principle of **limited liability**, meaning a stockholder is generally not personally liable for the debts of the corporation. This principle is crucial for encouraging investment and economic activity, as it allows individuals to participate in business ventures without risking their personal assets.

The Court cited Situs Development Corp. v. Asiatrust Bank, drawing a parallel to the case at bar. In Situs, the mortgaged lands were owned by the stockholders, not the corporation, and thus could not be included in corporate rehabilitation proceedings. Similarly, in the case of Bustos, the subject property was owned by Spouses Cruz, not MSI, and therefore could not be considered part of the corporation’s assets subject to the Stay Order. This distinction is vital in rehabilitation proceedings, where creditors’ claims are limited to demands against the debtor corporation or its property. Stay orders should only cover claims against corporations or their properties, guarantors, or sureties who are not solidarily liable, excluding accommodation mortgagors. The Court reiterated that properties owned by stockholders cannot be included in the inventory of assets of a corporation under rehabilitation.

The Supreme Court concluded that Joselito Hernand M. Bustos was not a creditor of MSI but rather a holder of a claim against Spouses Cruz. Therefore, the time-bar rule under Rule 4, Section 6 of the Interim Rules of Procedure on Corporate Rehabilitation, which requires creditors to file oppositions within 10 days of the initial hearing, did not apply to him. This means Bustos was not bound by the procedural deadlines applicable to creditors of MSI, as his claim was against the spouses personally and not against the corporation’s assets. Because the true owner of the property was not the corporation, the Stay Order should not have been extended to the property. The Court granted Bustos’ petition, reversing and setting aside the Court of Appeals’ decision. This clarification protects the property rights of individuals from being improperly entangled in corporate rehabilitation proceedings.

FAQs

What was the key issue in this case?	The central issue was whether the personal assets of stockholders could be held liable for the debts of a corporation undergoing rehabilitation. The Supreme Court clarified the conditions under which the corporate veil could be pierced.
What is the doctrine of separate juridical personality?	This doctrine recognizes that a corporation is a legal entity distinct from its stockholders. It means the corporation has its own rights, obligations, and assets, separate from those of its owners.
What is limited liability?	Limited liability is a principle arising from the doctrine of separate juridical personality. It protects stockholders from being personally liable for the debts and obligations of the corporation, generally limiting their risk to the amount of their investment.
What is a close corporation?	A close corporation is one whose articles of incorporation specify that the number of stockholders is limited, restrictions on stock transfer exist, and no public offering of stock is made. Not every corporation with few stockholders qualifies as a close corporation.
Under what conditions can stockholders of a close corporation be held liable for corporate debts?	Stockholders of a close corporation may be held liable if they are actively engaged in the management or operation of the business and commit corporate torts without adequate liability insurance. This is a specific exception to the general rule of limited liability.
What is a Stay Order in rehabilitation proceedings?	A Stay Order suspends all actions or claims against a corporation undergoing rehabilitation, allowing it to reorganize its finances. It typically covers claims against the corporation’s assets, guarantors, or sureties.
Are properties owned by stockholders automatically included in a corporation’s assets during rehabilitation?	No, properties owned by stockholders are not automatically included in the corporation’s assets. Only the corporation’s own assets can be subjected to rehabilitation proceedings.
What is the significance of the articles of incorporation in determining if a corporation is a close corporation?	The articles of incorporation must contain specific provisions that define the corporation as a close corporation. These provisions are essential for establishing its status as a close corporation.
What was the Court’s ruling in Situs Development Corp. v. Asiatrust Bank, and how does it relate to this case?	In Situs, the Court held that lands owned by stockholders, not the corporation, could not be included in corporate rehabilitation. This case reinforces the principle that stockholder assets are distinct from corporate assets.
What is the implication of this ruling for creditors of corporations?	Creditors must understand the distinction between corporate and personal assets. They cannot automatically assume that the assets of stockholders are available to satisfy corporate debts unless specific legal conditions are met.

The Bustos v. Millians Shoe, Inc. case serves as a clear reminder of the boundaries between corporate and individual liabilities. It underscores the importance of examining the corporate structure and adherence to statutory requirements before attempting to hold stockholders personally liable for corporate debts. It protects the interests of stockholders by upholding the separate juridical personality of corporations.

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: Joselito Hernand M. Bustos v. Millians Shoe, Inc., G.R. No. 185024, April 24, 2017