Corporations are established either by a single person, by partnership, or by several people. These are usually established to generate profit and conduct business. Generally, the personality, liabilities, and obligations of those who established the corporation and the corporation itself are separate and distinct. However, when corporations are used as shield for illegal activities, the doctrine of piercing of the corporate veil comes into play. When this happens, the liabilities of the corporation are attributed to its incorporators, disregarding their separate entity. This aims to prevent conduction of fraud and illegal activities.
Legal Basis
The current Revised Corporation Code governs this doctrine. It stipulates the provisions on the liabilities of directors, incorporators, and officers when the corporate fiction is abused1. Similarly, it is also guided by the Civil Code, particularly on the concept of fraud and torts, since the said doctrine operates in relation to fraud and torts. It governs the protection from abuse of such acts, and liability for these2.
Separate Corporate Personality
The doctrine of separate corporate personality holds that corporations are distinct from their incorporators, including their obligations, liabilities, and the like. It shows the limited liability of stockholders as they are only liable to the extent of their shares, and also upholds the protection of corporate assets and operations.
Piercing the Veil of Corporate Entity
The doctrine of piercing of the corporate veil operates oppositely. It is defined as a legal principle that disregards the separate juridical personality of corporations when it was established as a shield for fraud, illegal activities, or injustices. Consequently, the liabilities, obligations, and personalities of the corporation and its incorporators. Thus, the court holds them accountable as well for the corporation’s actions. This only applies when there is a misuse of the corporate personality.
Grounds or Elements of Piercing of the Corporate Veil
Courts cannot just simply “pierce through” the veil of a corporation to protect its separate personality. One ground is for when the corporate fiction is used as a shield for fraudulent and illegal activities, done by the person who has control. The corporate veil is pierced to prevent further perpetuation of fraud to happen and to not mislead creditors. In fraud cases, malice or evil motives must be present.
Another ground is when it is used to circumvent the law, happens when corporations become a medium to deliberately evade legal obligations or liabilities and when used to circumvent or bypass statues. The corporation becomes a mere conduit to avoid liabilities.
Another is with regards to achieving equity. The doctrine prevails to prevent injustice or unfairness brought about by the abuse of corporate shields. This happens when entities abuse their shield and separate personality which brings about unjust outcomes or injuries for the parties involved.
In the case of Invictus Food Products Corp. v. Sandpiper Spices & Condiments Corp, Sandpiper sued for breach of distribution agreement and argued that Invictus and RBW (related distributing company) misused trade secrets to produce competing products. It was found that Invictus and RBW hired Sandpiper’s research and development specialist for this to take place. The court ruled in favor of Sandpiper, and that the act sustained the doctrine of piercing of the corporate veil. The court also ruled that the corporate fiction was disregarded since it became a tool to perpetuate such breach3.
Common Scenarios
There are several scenarios wherein the corporate veil is pierced, and these are more common than not. Some of these are:
- Fraudulent behavior (including undercapitalization to defraud creditors) and evading obligations
- Utilizing the corporation as a mere conduit
- Integrating of corporate and personal affairs
- Layering to avoid proper tax dues
- Used to defeat workers’ rights
- Republic Act No. 11232, An Act Providing for the Revised Corporation Code of the Philippines (2019) ↩︎
- Civil Code of the Philippines, Republic Act No. 386, arts. 19–21, 2176 (1949). ↩︎
- Invictus Food Products Corp. v. Sandpiper Spices & Condiments Corp., G.R. No. 268176 (Phil.). (2023, October 25) ↩︎
