In Ever Electrical Manufacturing, Inc. v. Samahang Manggagawa ng Ever Electrical, the Supreme Court clarified the circumstances under which a corporate officer can be held solidarily liable with a corporation for separation pay when a business closes. The Court ruled that while companies must provide separation pay to employees during closures not caused by serious financial losses, corporate officers are generally not personally liable unless they acted with malice or bad faith. This decision underscores the importance of distinguishing between business decisions and malicious conduct in determining personal liability in corporate closures.

When Business Closure Leads to Employee Claims: Unpacking Corporate and Personal Liability

The case originated from the closure of Ever Electrical Manufacturing, Inc. (EEMI), which led to the termination of its employees’ services. The employees, represented by Samahang Manggagawa ng Ever Electrical/NAMAWU Local 224, filed a complaint for illegal dismissal, seeking separation pay, damages, and attorney’s fees, alleging that the closure was abrupt and disregarded labor code requirements. EEMI countered that the closure was due to significant financial setbacks, including losses from investments and an inability to meet loan obligations, leading to a dacion en pago arrangement with United Coconut Planters Bank (UCPB).

Initially, the Labor Arbiter (LA) ruled that the employees were not illegally dismissed but ordered EEMI and its President, Vicente Go, to pay separation and 13th-month pay. However, the National Labor Relations Commission (NLRC) reversed this decision, stating that the business cessation was due to serious business losses, thus negating the employees’ entitlement to separation pay. On appeal, the Court of Appeals (CA) sided with the employees, reinstating the LA’s decision and holding both EEMI and Vicente Go solidarily liable, reasoning that the closure stemmed from the enforcement of a writ of execution rather than business losses. The CA cited the Restaurante Las Conchas v. Lydia Llego case to support its decision on solidary liability, which prompted EEMI and Go to elevate the case to the Supreme Court.

The Supreme Court addressed two primary issues: whether the CA erred in determining that the closure of EEMI was not due to business losses, and whether Vicente Go should be held solidarily liable with EEMI. The Court referenced Article 283 of the Labor Code, which delineates the conditions under which an employer may terminate employment due to business closure or retrenchment. This article mandates separation pay unless the closure results from serious business losses or financial reverses. According to Article 283 of the Labor Code:

Art. 283. Closure of establishment and reduction of personnel. — The employer may also terminate the employment of any employee due to the installation of labor saving devices, redundancy, retrenchment to prevent losses or the closing or cessation of operation of the establishment or undertaking unless the closing is for the purpose of circumventing the provisions of this Title, by serving a written notice on the workers and the Ministry of Labor and Employment at least one (1) month before the intended date thereof. In case of termination due to the installation of labor saving devices or redundancy, the worker affected thereby shall be entitled to a separation pay equivalent to at least his one (1) month pay or to at least one (1) month pay for every year of service, whichever is higher. In case of retrenchment to prevent losses and in cases of closures or cessation of operations of establishment or under taking not due to serious business losses or financial reverses, the separation pay shall be equivalent to one (1) month pay or at least one-half (1/2) month pay for every year of service, whichever is higher. A fraction of at least six (6) months shall be considered one (1) whole year.

The Court affirmed the CA’s decision that EEMI’s closure was not primarily due to business losses but rather the enforcement of a judgment against the company. Consequently, EEMI was obligated to provide separation pay to its employees. However, the Court diverged from the CA’s ruling regarding the solidary liability of Vicente Go. The general principle is that corporate officers are not personally liable for the corporation’s obligations, as corporations possess a separate legal personality. The Court acknowledged this principle, citing Sunio v. National Labor Relations Commission:

[A] corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. 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.

While the LA and CA relied on the Restaurante Las Conchas case to justify holding Go solidarily liable, the Supreme Court clarified that this case represented an exception rather than the rule. The Court emphasized that the exception applies under specific circumstances, such as when the corporation is no longer existing or is unable to satisfy the judgment in favor of the employees, and the officers acted on behalf of the corporation with malice or bad faith. This distinction was further highlighted in subsequent cases such as Mandaue Dinghow Dimsum House, Co., Inc. and/or Henry Uytengsu v. National Labor Relations Commission and Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations Commission, where the Court refused to apply the Restaurante Las Conchas ruling due to the absence of bad faith or malice on the part of the corporate officers.

In Pantranco Employees Association (PEA-PTGWO) v. NLRC, the Court elaborated on the circumstances where piercing the corporate veil is appropriate:

[T]he 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. In the absence of malice, bad faith, or a specific provision of law making a corporate officer liable, such corporate officer cannot be made personally liable for corporate liabilities.

The Supreme Court found no evidence that Vicente Go acted with malice or bad faith in managing EEMI or in the decision to close the business. The Court reiterated that business failures can result from various factors, and unless the closure is proven to be a deliberate act of malice or bad faith, the separate legal personality of the corporation should be respected. Therefore, Vicente Go could not be held jointly and solidarily liable with EEMI. The Court emphasized the significance of demonstrating malicious intent or bad faith to justify holding a corporate officer personally liable, reinforcing the protection afforded by the corporate veil.

FAQs

What was the key issue in this case?	The primary issue was whether the president of a corporation could be held personally liable for the corporation’s obligation to pay separation pay to its employees following a business closure. The Court also considered whether the closure was due to genuine business losses.
Under what circumstances can a corporate officer be held liable for corporate debts?	A corporate officer can be held liable if they acted with malice, bad faith, or were directly involved in fraudulent activities. The doctrine of piercing the corporate veil is applied when the corporate entity is used to evade obligations or protect fraud.
What is the significance of Article 283 of the Labor Code?	Article 283 of the Labor Code outlines the conditions for lawful termination of employment due to business closure and specifies the entitlement to separation pay. It distinguishes between closures due to serious business losses and those due to other reasons.
What did the Court decide regarding Ever Electrical Manufacturing, Inc.?	The Court affirmed that EEMI was obligated to provide separation pay to its employees because the closure was due to the enforcement of a judgment, not due to financial losses. However, it absolved the company’s president, Vicente Go, from personal liability.
Why was Vicente Go not held personally liable?	Vicente Go was not held personally liable because there was no evidence of malice or bad faith in his management of the company or in the decision to close the business. The Court upheld the principle of separate corporate personality.
What is the “corporate veil,” and why is it important?	The “corporate veil” refers to the legal separation between a corporation and its owners or officers. It protects individuals from being personally liable for the corporation’s debts and obligations, unless specific circumstances warrant piercing it.
How does this case relate to the ruling in Restaurante Las Conchas v. Lydia Llego?	While the CA cited Restaurante Las Conchas to justify holding Vicente Go solidarily liable, the Supreme Court clarified that the case was an exception and required a showing of malice or bad faith, which was absent in this case.
What must an employer prove to avoid paying separation pay during a business closure?	An employer must convincingly demonstrate that the closure was due to serious business losses or financial reverses. Absent such proof, the employer is generally required to pay separation pay.

In summary, the Supreme Court’s decision underscores the importance of carefully evaluating the reasons behind business closures and the conduct of corporate officers in determining liability for separation pay. While companies must compensate employees when closures are not due to financial distress, personal liability for corporate officers requires a clear demonstration of malice or bad faith.

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: EVER ELECTRICAL MANUFACTURING, INC. vs. SAMAHANG MANGGAGAWA NG EVER ELECTRICAL, G.R. No. 194795, June 13, 2012