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RESTATEMENT OF THE DOCTRINE OF PIERCING

THE VEIL OF CORPORATE FICTION

CESAR L. VILLANUEVA, B.S.C, LL.B., LL.M.

The title of this paper may expectedly lead to the impression that the main thrust

would be to rehash existing decisions on the doctrine of piercing the veil of corporate fiction.

Although that would be the process, the aim of this paper is to emphasize more the

complementary relationship of the piercing doctrine to the main doctrine that a corporation

has a juridical personality separate and distinct from the stockholders or members who

compose it.

Looking at the number of decisions rendered by the Supreme Court where it has

pierced the veil of corporate fiction, compared with the handful of decisions by which it has

refused to apply the piercing doctrine and instead affirmed the main doctrine of separate

juridical personality, may give one the impression that the main doctrine has lost some of

its vitality, and that the piercing doctrine has grown lush and vital.

It is always comforting to note, especially for businessmen for whom the corporate

entity has undoubtedly become the most popular medium to pursue business endeavors,

that the viability and vitality of a doctrine is to be tested not by the times it has been

challenged and overcome in court decisions, but by the usefulness and frequency of its

employment in the market place. The enormity of the number of Supreme Court decisions

applying the piercing doctrine does not even begin to show the thousands and thousands

of daily transactions negotiated and completed employing the corporate entity without hitch.

When dealing with piercing cases, it is always important consider that the aim which

is, or at least should be, sought to be achieved by the Court is not to use the piercing doctrine

as a ram to break down the ramparts of the main doctrine of separate juridical personality,

but more properly for the ancillary piercing doctrine to act as a regulating valve by which to

preserve the powerful engine that is the main doctrine of separate juridical personality.

It is important therefore to consider that the vitality of the main doctrine of separate

juridical personality is essential in preserving and promoting the corporation as an entity by

which the business community can continue to harness capital resources and undertake

either risky or large-scale enterprises; and that the development of the piercing doctrine

should not act in competition with, but rather to complement and make more vital, the main

doctrine of separate juridical personality.

I. The Main Doctrine of Separate Juridical Personality

Since its introduction in the Philippines in 1906, the corporation has been defined as

"an artificial being created by operation of law, having the right of succession and the

powers, attributes and properties expressly authorized by law or incident to its existence."

This same definition has been adopted by Section 2 of the present Corporation Code, and

is the basis of the main doctrine that a corporation being a juridical person has a personality

separate and distinct from the stockholders or members who compose it.

The granting to the corporate entity of a strong separate juridical personality has

been considered as the attribute or privilege most characteristic of the corporation. Unlike

the cumbersome juridical personality of its nearest rival, the partnership, the separate

juridical personality of the corporation has features that has made it most attractive to

businessmen: right of succession, limited liability, centralized management, and generally

free transferability of shares of stock. Therefore, an undermining of the separate juridical

personality of the corporation, such as the application of the piercing doctrine, necessarily

dilutes any or all of these attributes.

The stability of the main doctrine of separate juridical personality is inextricably linked

with the attractiveness of the corporation as an efficient medium by which businessmen can

pursue business enterprises. And the undermining of the main doctrine would also compel

businessmen to have to enter into inefficient and costly contractual relations to fill the gaps

created by a flawed main doctrine.

The Court has not been wanting in paying lip service to the main doctrine of separate

juridical personality, especially in recent years, when it seems, at every turn, a proposition

to pierce the veil of corporate fiction has become a knee-jerk reaction in most litigations

involving corporate parties. However, as discussed in this paper, the Court has not really

taken a clear and direct path on the main doctrine vis-a-vis the piercing doctrine.

In Stockholders of F. Guanzon and Sons, Inc. v. Register of Deeds of Manila, the

distribution of the corporate properties to the stockholders was deemed not in the nature of

a partition among co-owners, but rather a disposition by the corporation to the stockholders,

as opposite parties to a contract. It held that "[a] corporation is a juridical person distinct

from the members composing it [and that] [p]roperties registered in the name of the

corporation are owned by it as an entity separate and distinct from its members. While

shares of stock constitute the personal property, they do not represent property of the

corporation. x x x A share of stock only typifies an aliquot part of the corporation's property,

or the right to share in its proceeds to that extent when distributed according to law and

equity, but its holder is not the owner of any part of the capital of the corporation, nor is he

entitled to the possession of any definite portion of its property or assets. The stockholder

is not a co-owner or tenant in common of the corporate property."

Manila Gas Corp. v. Collector of Internal Revenue held that the tax exemptions

granted to a corporation do not pertain to its corporate stockholders due to their separate

corporate personalities. "A corporation has a personality distinct from that of its

stockholders, enabling the taxing power to reach the latter when they receive dividends from

the corporation. It must be considered as settled in this jurisdiction that dividends of a

domestic corporation which are paid and delivered in cash to foreign corporations as

stockholders are subject to the payment of the income tax, the exemption clause to the

charter [of the domestic corporation] notwithstanding."

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RESTATEMENT OF THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION by Cesar L. Villanueva, b.s.c, ll.b., ll.m. The title of this paper may expectedly lead to the impression that the main thrust would be to rehash existing decisions on the doctrine of piercing the veil of corporate fiction. Although that would be the process, the aim of this paper is to emphasize more the complementary relationship of the piercing doctrine to the main doctrine that a corporation has a juridical personality separate and distinct from the stockholders or members who compose it. Looking at the number of decisions rendered by the Supreme Court where it has pierced the veil of corporate fiction, compared with the handful of decisions by which it has refused to apply the piercing doctrine and instead affirmed the main doctrine of separate juridical personality, may give one the impression that the main doctrine has lost some of its vitality, and that the piercing doctrine has grown lush and vital. It is always comforting to note, especially for businessmen for whom the corporate entity has undoubtedly become the most popular medium to pursue business endeavors, that the viability and vitality of a doctrine is to be tested not by the times it has been challenged and overcome in court decisions, but by the usefulness and frequency of its employment in the market place. The enormity of the number of Supreme Court decisions applying the piercing doctrine does not even begin to show the thou ...
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